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Historical financial information in offer documents prepared in accordance with NZ IFRS. Securities Commission practice note 3/2005 [2005] NZSecCom 2 (17 March 2005)

Last Updated: 10 November 2014

SECURITIES COMMISSION PRACTICE NOTE
No 3/2005

17 March 2005

Historical financial information in offer documents prepared in accordance with NZ IFRS

Relevant Legislation
Securities Act 1978
Securities Regulations 1983

Contents

• Introduction
• Definition of Terms
• Purpose
• Background
• Compliance with the Securities Act 1978 and Securities Regulations 1983 - Summary Financial Information
• Enforcement Approach
• Note
• Appendix 1

INTRODUCTION

1. This practice note addresses certain issues relating to summary historical financial information in offer documents required under the Securities Act 1978 ("the Act") and Securities Regulations 1983 ("the Regulations"). These issues are expected to arise for an issuer the first time it adopts New Zealand equivalents to international financial reporting standards (NZ IFRS) in historical financial statements. The practice note clarifies the Securities Commission's view on the application of the Act and the Regulations in this context. It is intended for people who prepare and examine summary historical financial information in offer documents.
2. The practice note sets out how issuers should discharge their statutory obligations to disclose summary historical financial information in offer documents at the time of adoption of NZ IFRS. It also sets out the approach the Securities Commission intends to take in the enforcement of securities law.
3. The principles in this practice note should also apply to schemes, and a business or subsidiary acquired by an issuer as addressed by the Act and Regulations. In these cases references to the financial statements of the issuer should be read as applying to those of the acquired business or subsidiary.
4. This practice note addresses:
   • the impact of NZ IFRS 1: First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards ("NZ IFRS 1"), on the presentation of summary historical financial information in offer documents; and
   • the preparation and disclosure of summary historical financial information in offer documents following an issuer's implementation of NZ IFRS 1 in historical financial statements.
5. This practice note should be interpreted subject to the overriding concept of materiality. In securities law a material matter is one that would be likely to influence a reasonable person in making a decision whether or not to subscribe for the securities, without necessarily being determinative of the decision.
6. The Commission will review this practice note as financial reporting standards are approved by the Accounting Standards Review Board ("ASRB"), and will make changes if necessary.

Definition of Terms

7. In this practice note, terms are used as follows:
   
   Previous GAAP - the basis of accounting that an issuer used for preparing historical financial statements immediately before adopting NZ IFRS.
   
   NZ IFRS - standards that are approved financial reporting standards under the Financial Reporting Act 1993, and that have been approved by the ASRB on the basis that they correspond to IFRS, whether or not approved by the Board in a different form to take account of New Zealand conditions or any other matter the Board considers relevant.

Purpose

8. The Securities Commission has considered the implications of the transition to NZ IFRS on the financial information disclosure requirements contained in the Act and the Regulations, including the presentation and disclosure of summary historical financial information. We have particularly noted the potential impact of NZ IFRS 1.
9. For general purpose financial reports, NZ IFRS requires at least one year's comparative information which complies with NZ IFRS to be disclosed at the reporting date1. Comparative information for periods before the first period that an entity presents full comparative information are not required to comply with the recognition and measurement requirements of NZ IFRS2.
10. During the transition from previous GAAP to NZ IFRS, offer documents prepared under the Act are likely to contain summary historical financial information relating to both pre- and post-transition accounting periods. This would mean that the summary historical financial information may contain information for some periods prepared on the basis of previous GAAP, and for other periods on the basis of NZ IFRS.
11. The Securities Commission considers this situation has the potential to confuse or mislead investors, particularly if an issuer's reported financial position, financial performance, and cash flows will be materially different following adoption of NZ IFRS. Registered prospectuses and advertisements prepared under the Act and Regulations must not contain any statements that are likely to mislead readers (including by omission).

Background

12. The Financial Reporting Standards Board (FRSB) is implementing the ASRB's decision to adopt IFRS issued by the International Accounting Standards Board (IASB). The standards will apply to reporting periods beginning on or after 1 January 2007. Entities can elect to adopt NZ IFRS for reporting periods beginning on or after 1 January 2005.
13. NZ IFRS 1 prescribes standards required to be applied by entities adopting NZ IFRS3 for the first time from the date of an entity's transition to NZ IFRS. It will apply to an entity's first NZ IFRS financial statements, comparative financial statements and each interim financial report, if any, presented for part of the period covered by its first NZ IFRS financial statements.
14. Issuers who adopt NZ IFRS in their historical financial statements for the first time and who prepare offer documents, will need to address NZ IFRS issues in their offer documents, as well as the requirements of the Act and the Regulations. These matters are addressed below.

Compliance with the Securities Act 1978 and Securities Regulations 1983 - Summary Financial Information

15. NZ IFRS 1 states that where an entity chooses, or is required, to present historical summaries of selected financial information, for periods before the first period for which full comparative information under NZ IFRS is presented, that entity is not required to comply with the recognition and measurement requirements of NZ IFRS. Instead, NZ IFRS 1 states that entities should:
    
    

a)

label the previous GAAP information prominently as not being prepared under NZ IFRS; and

b)

disclose the nature of the main adjustments that would make it comply with NZ IFRS. An entity need not quantify those adjustments4.

16. The Regulations require a prospectus to include summary financial statements of an issuer or scheme (and in some circumstances of other entities) for each of the 5 consecutive accounting periods preceding the date of the statement of financial position.
17. The Securities Commission notes that the full financial statements in a prospectus for the first accounting period of an issuer after adoption of NZ IFRS will include comparative historical information for the most recent year prior to adoption of NZ IFRS. This is required to be presented in accordance with NZ IFRS. The restated information should also be comparable with the historical financial summary provided for the same accounting period.
18. Accordingly, the restated comparative information included in the first NZ IFRS compliant full financial statements should also be provided in summary form in prospectuses, as well as the actual financial summary for that year. This means that summary historical financial information for the year prior to NZ IFRS adoption is to be disclosed under both previous GAAP and NZ IFRS. An example has been provided in Appendix 1 to this practice note. This, together with the description of the main adjustments needed between the previous GAAP and NZ IFRS summaries, required under the NZ IFRS 1, will allow investors to see the effect (if any) of the material changes in the financial reporting of an issuer.
19. This will ensure that the historical financial summary for that year is comparable to the restated full year comparative financial statements for that year and to the actual financial statements prepared for that year. This disclosure will increase the usefulness of the historical financial information provided in offer documents for investors.
20. Where summary historical financial information contains information relating to the year of transition and appears in a prospectus at any time after the year of (NZ IFRS) adoption, then both NZ IFRS and previous GAAP summary historical financial information should be disclosed for the year of transition. Where any adjustments made between previous GAAP and NZ IFRS remain material, then disclosure of those adjustments should be given.

Enforcement Approach

21. The Securities Commission intends to monitor offer documents published during the transition to and implementation of NZ IFRS. It will act against those it considers are likely to mislead investors. This practice note aims to assist issuers who prepare offer documents during this period by setting out the appropriate approach to the presentation of summary historical financial information in registered prospectuses.
22. The Securities Commission is responsible for enforcement of securities law. It has powers under the Securities Act to cancel the registration of any prospectus that it considers is likely to mislead or deceive investors in a material particular, and to prohibit the distribution of any advertisement for securities that it considers is likely to deceive, mislead, or confuse investors.

Note

23. The Securities Commission cannot give rulings on the interpretation of the law or provide legal advice. This practice note is provided for guidance only. The Securities Commission will publish further practice notes from time to time. However, the Securities Commission is not bound by this or any other practice note.

Appendix 1

Example 1 - An entity that intends to early adopt NZ IFRS on 1 January 2005 and issues a prospectus that contains (or refers to) the financial statements for the year ended 31 December 2005.

Summary Financial Statements

* To insert, the amounts that appear in the financial statements required by the Securities Regulations 1983.

It should be noted that the entity will produce full NZ IFRS compliant historical financial statements for the year ended 31/12/2005, including restated comparatives (from previous GAAP to NZ IFRS) for 31/12/2004.

Example 2 - An entity that intends to early adopt NZ IFRS on 1 July 2005 and issues a prospectus that contains (or refers to) the financial statements for the year ended 30 June 2006.

Summary Financial Statements

* To insert, the amounts that appear in the financial statements required by the Securities Regulations 1983.

It should be noted that the entity will produce full NZ IFRS compliant historical financial statements for the year ended 30/06/2006, including restated comparatives (from previous GAAP to NZ IFRS) for 30/06/2005.

Footnotes

1. NZ IFRS 1 paragraph 36, this is necessary to comply with NZ IAS 1 Presentation of Financial Statements.
2. NZ IFRS 1 paragraph 37
3. References to NZ IFRS also include NZ IAS.
4. NZ IFRS 1 paragraph 37