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Financial Rreporting surveillance programme cycle 3 [2006] NZSecCom 4 (11 September 2006)

Last Updated: 11 November 2014

Financial Reporting Surveillance Programme

REVIEW OF FINANCIAL REPORTING BY ISSUERS CYCLE 3

CONTENTS
EXECUTIVE SUMMARY
INTRODUCTION
Financial Reporting Surveillance Programme
Cycle 3 Review of Financial Reporting by Issuers
Background and Work Undertaken
Purpose of this Report
RESULTS OF THE REVIEW
Follow-up Action
Outcome of Matters Raised
Significant Matters
Omission of disclosures required by FRS-41
Parent financial statements materially incorrect
Retention of a provision where no present obligation existed
Classification of convertible instruments insufficiently clear
Non-disclosure of an actual versus prospective financial information comparison
Lack of a total recognised revenues and expenses line in the Statement of Movements in Equity
Failure to date the financial statements
Non-disclosure of a significant future commitment
Accounting for an unconditional sale of properties
Accounting treatment for recognition of reclaimed lands
Minor Matters
Recurring minor matters
Miscellaneous matters
Market Matters: NZX Referrals
FOLLOW-UP FROM CYCLE 1
FOLLOW-UP FROM CYCLE 2
INTERNATIONAL FINANCIAL REPORTING STANDARDS
ONGOING REVIEW AND ENFORCEMENT

EXECUTIVE SUMMARY

The Commission has established a financial reporting surveillance programme to review financial reporting practices of issuers. The aim is to encourage New Zealand issuers to improve the quality of their financial reporting.

In Cycle 3 the Commission reviewed the financial reports of 45 issuers with balance dates from 31 March 2005 to 30 September 2005. The purpose of the Cycle 3 review was to identify the level of compliance with Financial Reporting Standards and other elements of Generally Accepted Accounting Practice and to assess the overall quality of financial reporting.

This report on the Cycle 3 Review provides market participants with the Commission's findings from this review, and gives some guidance on the Commission's expectations of disclosure by issuers.

Cycle 3 findings were similar to Cycle 1 & 2 results in that few serious problems were identified, but a number of issuers need to raise the standard of their financial reporting. Reports of 19 issuers of the 45 reviewed had matters that needed to be addressed. The Commission wrote to these issuers.

The key issues amongst the significant matters found were:

• omission of disclosures required by FRS-41: Disclosing the Impact of Adopting New Zealand Equivalent to International Financial Reporting Standards;
• parent financial statements materially incorrect;
• retention of a provision where no present obligation existed;
• classification of convertible instruments insufficiently clear;
• non-disclosure of an actual versus prospective financial information comparison;
• lack of a total recognised revenues and expenses line in the Statement of Movements in Equity; and
• failure to date the financial statements.

The Commission has been pleased with the cooperation from issuers and their willingness to improve the quality of their financial reporting.

The review also identified some issues relating to continuous disclosure notices that have been referred to NZX for their consideration.

The Commission will continue its Financial Reporting Surveillance Programme. The financial reports of early adopters of New Zealand Equivalents to International Financial Reporting Standards with a 31 December 2005 balance date are currently being reviewed. This is part of the Commission's plan to review disclosures and adjustments made by issuers as they move to NZ IFRS.

INTRODUCTION

Financial Reporting Surveillance Programme
1.

The Securities Commission is required under section 10(c) of the Securities Act 1978, "to keep under review practices relating to securities, and to comment thereon to any appropriate body".
2.

As part of its work to carry out this function the Commission has established a financial reporting surveillance programme to review financial reporting practices of public issuers.
3.

The Financial Reporting Act 1993 requires issuers to prepare financial statements that comply with New Zealand Generally Accepted Accounting Practice (NZ GAAP) and give a true and fair view of the matters to which they relate.
4.

The aim of the Commission's programme is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

1. issuers' financial report disclosures are clear and comprehensive;
2. investors can have confidence in the credibility of financial information provided by issuers; and

100. high quality financial reporting will contribute to the integrity of New Zealand's securities markets.

Cycle 3 Review of Financial Reporting by Issuers
5.

In the third cycle of the programme the Commission reviewed the financial reports of 45 issuers with balance dates from 31 March 2005 to 30 September 2005.
6.

The reports were reviewed against NZ GAAP. Financial statements comply with NZ GAAP only if they comply with:

1. applicable Financial Reporting Standards (FRS) approved by the New Zealand Accounting Standards Review Board; and
2. where there are no such standards, accounting policies that:
   1. are appropriate to the circumstances of the reporting entity; and
   2. have authoritative support within the accounting profession in New Zealand. This includes Statements of Standard Accounting Practice (SSAP).

7.

The purpose of the review was to form a view on:

1. the level of compliance with NZ GAAP by issuers in their financial statements prepared under the Financial Reporting Act 1993;
2. whether any breaches of NZ GAAP identified in those financial statements were likely to cause the financial statements to not 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

100. the overall quality of financial reporting practices by issuers.

8.

Although the main focus of the review was the financial statements, other sections of the annual report and continuous disclosure notices for the period were also considered. These were not comprehensively reviewed, although any obvious issue related to continuous disclosure, directors' and officers' relevant interests' disclosure or substantial security holder disclosure was followed up.
9.

Financial reporting requires the exercise of professional judgment. The Commission took this into account when reviewing the financial reports and determining which matters to follow up.

Background and Work Undertaken
10.

The Commission reviewed the audited full-year financial reports of 45 companies with balance dates from 31 March 2005 to 30 September 2005. To gain a complete view of financial reporting practices the following were also reviewed:

1. financial information in any current prospectuses;
2. substantial security holder information;

100. continuous disclosure notices; and

4. other sections of the annual reports.

11.

The review of the wider information was to identify any inconsistencies between the various documents, which in turn helped assess the adequacy of NZ GAAP compliance.
12.

The selection of 45 issuers was made up of:

1. 37 issuers listed on the NZX;
2. 2 issuers listed on the NZAX;

100. 2 issuers whose shares are traded on Unlisted; and

4. 4 other non-listed issuers.

13.

Further enquiries were made of some issuers. In some instances this was because it was not possible to assess whether NZ GAAP had been fully complied with from the information provided in the financial statements and other documents.

Purpose of this Report
14.

This report on Cycle 3 of the Commission's Financial Reporting Surveillance Programme provides market participants with the Commission's findings from this review. It also provides guidance on the Commission's expectations of disclosure by issuers.

RESULTS OF THE REVIEW
15.

As with Cycles 1 and 2 few serious problems were identified in the Cycle 3 review. However, also similar to the earlier reviews, Cycle 3 found that some issuers need to raise the standard of their financial reporting.
16.

Most of the identified shortcomings can be remedied by greater attention to detail in respect of the requirements of NZ GAAP.

Follow-up Action
17.

As with Cycle 2, reports of 19 issuers had matters that the Commission considered should be addressed. Letters were sent to these 19 issuers asking them to clarify some matters, and/or to address specific shortcomings when preparing their next financial reports.
18.

The Commission's approach is to write to issuers whose reporting raises matters of significance. A matter is considered "significant" if further clarification or information is needed. For example, where a matter:

1. appears to be wrong;
2. does not appear to make sense;

100. is not clear and lacks transparency;

4. seems unusual or irregular;
5. raises questions about its validity; or
6. has insufficient explanation.

19.

In some cases the disclosures raised questions which prompted the Commission to seek further explanation. Some responses from issuers explained the situation, indicating that the questions would not have been raised if the issuer's original disclosure had been clearer or more transparent.
20.

In the letters on significant matters any minor matters were also drawn to the attention of the issuer. We did not write to issuers whose reports raised only minor matters.
21.

A copy of the letter was sent to the issuer's auditor in most cases. Auditors have an important role in encouraging companies to comply not only with the statutory requirements but also with best practice. The Commission encourages auditors to be vigilant in the audit of financial statements. High quality external auditing is critical to integrity in financial reporting. Investors rely heavily on the external assurance of an issuer's financial reporting.
22.

For the first time as part of the on-going surveillance programme a matter relating to an auditor was referred to NZICA for consideration for follow-up action.

Outcome of Matters Raised
23.

Thirty-nine percent of the matters raised in letters to issuers were viewed by the Commission as significant. This compares with fifty-two percent for Cycle 1 and twenty-nine percent for Cycle 2.
24.

Table 1 on page 8 shows the outcome of matters raised with issuers.

Table 1: Outcome of matters raised in letters to issuers

Notes to the Table

1. Resolved: a satisfactory explanation was provided by the issuer on the matters raised.
2. Point taken / change agreed: the issuer has acknowledged the point made / agreed to make changes in the 2005 or 2006 financial statements.
3. Second letter sent: a second letter closed the matter but reiterated the points made.
4. Other follow-up action: more action required, e.g. the need for subsequent correspondence to seek answers to follow-up questions.

25.

The significant matters that came up several times in Cycle 3 related to:

1. the format of the Statement of Movements in Equity - lack of a total recognised revenues and expenses line (6 instances);
2. Non-compliance with FRS-41 Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards.(3 instances);

These matters are explained further below.
26.

Satisfactory agreement was reached with issuers on 81% of significant matters raised. Three of the remaining five significant matters were reiterated in a second letter and will be monitored on an on-going basis. Two are being followed up separately.
27.

On a more positive note, the number of instances of failure to date and/sign the financial report had decreased. The Cycle 3 review found only one instance of such non-compliance compared with four in Cycle 2 and three in Cycle 1.
28.

No improvement was found regarding the disclosure of total recognised revenues and expenses lines in the Statement of Movement in Equity. Cycle 3 review found six instances of this non-compliance, the same number as in Cycle 2.
29.Apart from the matters noted in paragraph 23 above, other significant matters noted are generally of a different nature from those in Cycles 1 and 2.

Significant Matters
30.

The significant matters found were:

1. omission of disclosures required by FRS-41: Disclosing the Impact of Adopting New Zealand Equivalent to International Financial Reporting Standards;
2. parent financial statements materially incorrect;

100. retention of a provision where no present obligation existed;

4. classification of convertible instruments insufficiently clear;
5. non-disclosure of an actual versus prospective financial information comparison;
6. lack of a total recognised revenues and expenses line in the Statement of Movements in Equity;
7. failure to date the financial statements; and
8. non-disclosure of a significant future commitment.

31.

The following matters were also raised with issuers:

1. accounting for an unconditional sale of properties; and
2. accounting treatment for recognition of reclaimed lands.

Issuers provided adequate explanations about these.
32.

The nature of many of the matters raised with issuers indicates that issuers should pay greater attention to detail in complying with some of the financial reporting disclosures (e.g. disclosures in respect of financial instruments and related party disclosures).

Omission of disclosures required by FRS-41
33.

Entities have to adopt New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) for reporting periods beginning on or after 1 January 2007 or choose to early adopt for reporting periods beginning on or after 1 January 2005.
34.

Important information on the transition to adoption is required by FRS-41: Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards. FRS-41 applies to annual, half yearly and quarterly reporting periods of issuers that end on or after 30 June 2005.
35.

The Commission has analysed the FRS-41 disclosures for Cycle 3 issuers that were required to make these disclosures.
36.

The Commission acknowledges that a great deal of effort is going into NZ IFRS transition but is disappointed with the level of response to these disclosures in the financial statements examined in Cycle 3.
37.

These disclosures are very important as they provide an opportunity for issuers to signal to the market as to the likely impact of adoption of NZ IFRS.
38.

The annual reports of the 45 Cycle 3 issuers indicate that:

1. 40% of issuers complied fully with FRS-41; and
2. 53% of the issuers either did not disclose any information about adoption of NZ IFRS or made disclosures that only partially complied with FRS-41.

The remaining 7% were issuers to which FRS-41 did not apply because of the timing of their balance dates.
39.

The Commission has written to issuers that did not include this information in this report seeking details about the issuers NZ IFRS conversion process.
40.

Many did not include a cautionary statement that the actual impact of adopting NZ IFRS may vary from the information presented and that the variation may be material. Others did not include explanations of the expected key differences or estimated impacts or, where these were not known, statements to that effect.
41.

Overall, the level of detail of the disclosures was varied:

1. some 46% had detailed and specific disclosures;
2. 16% had a medium amount of mainly general information; and

100. 31% had either minimal or no disclosures.

The remaining 7% were not required to disclose information about the transition to NZ IFRS.
42.

Many provided detailed information on the background to adoption of NZ IFRS. Some disclosed the effects of first time adoption, including the exemptions available on first time adoption of NZ IFRS. Some made no disclosure on this. Issuers who did provide disclosure on adoption of NZ IFRS devoted space to it ranging from three sentences to four A4 pages of information.
43.

There is an expectation that if an issuer has some IFRS numbers, the issuer should disclose them. Also plain English explanations of what the transition to IFRS means to readers is always preferred.
44.

Comments on the various specific FRS-41 requirements:

1. Transition management disclosure
   Forty-seven percent had medium to detailed narrative disclosures about managing the transition to NZ IFRS. They appeared prepared for adoption or had begun considering the process. Many had set up audit, risk or steering committees and engaged outside consultants to oversee, manage or undertake the process. Some issuers disclosed expected changes to systems, business and financial procedures in addition to accounting and reporting policy changes. Most issuers were just starting to evaluate the impact of change, although two issuers started as early as December 2003 and February 2004. Some issuers are well advanced in the evaluation process and two issuers reported their project on transition completed at the date of their 2005 annual reports. Only 23 of the 45 issuers made a positive statement on their expected date of adoption of NZ IFRS.

About half the issuers made minimal or no disclosure of their transition management. They either had not started the process or were in the early stages of considering the impact. Many had not determined the adoption date, considered the timing of adoption or identified the expected key areas of difference in accounting policies that were likely to arise.

2. Narrative key differences disclosure
   Of the 45 issuers, 80% complied with FRS-41 and included a narrative explanation of the expected key difference in accounting policies, or, if not known, a statement to that effect. Of these, 29 issuers (65%) included narrative disclosures about the expected key difference in accounting policies. Many of these disclosures were good detailed disclosures, some indicating the specific impact on the issuer concerned. Some 13% of the issuers did not comply with the FRS-41 requirements. 28% made no narrative disclosures of the key differences.

Issuers identified between one and 12 key areas of difference that were considered most likely to impact on their accounting policies based on the NZ IFRS issued to date. The three most commonly identified areas were NZ IAS 39 Financial Instruments - Recognition and Measurement (cited in 31 instances), NZ IAS 12 Income Taxes (cited in 27 instances) and NZ IAS 38 Intangible Assets (cited in 18 instances). Other areas included accounting for business combinations, share-based payments, revenue, first time adoption of NZ IFRS, property, plant and equipment, investment properties, presentation of financial statements, employee benefits, financial instruments presentation, and impairment.

100. Quantified disclosure
     Eighty percent complied with FRS-41 by disclosing known or reliably estimable information about the impacts on the financial report had it been prepared using NZ IFRS, or, if not known, a statement to that effect. Of these, only three issuers provided quantitative information in the form of pro-forma financial statements and/or tables reconciling equity and financial performance under NZ GAAP and NZ IFRS. Many others (18%) provided selected quantitative figures, mainly in the area of goodwill. Some 68% of the issuers reviewed provided no quantitative disclosures, many indicating that the quantitative impacts had not been determined.

4. Cautionary statement disclosure
   Forty-five percent complied with FRS-41 by including a cautionary statement warning users that the actual impact of adopting NZ IFRS may vary from the information presented and that the variation may be material. However, many did include general cautionary statements such as:
   1. the expected impacts disclosed were based on NZ IFRS and interpretations as at the date of the disclosures;
   2. the expected impacts disclosed were not exhaustive; and
   3. that the pronouncements were under continuing review and interpretation both by the standard setters and directors.

Parent financial statements materially incorrect
45.

An issuer in its parent financial statements incorrectly included dividends received from a subsidiary through the Statement of Movements in Equity rather than through the Statement of Financial Performance as required by NZ GAAP.
46.

The effect was to materially understate parent revenue. Although the transaction eliminates at the group financial statement level the Financial Reporting Act does require parent financial statements to fully comply with NZ GAAP.
47.

The Commission indicated to the issuer that it expects this error to be corrected in their 2006 financial statements.

Retention of a provision where no present obligation existed
48.

One issuer set up a fund for the purpose of defending certain legal issues but no significant issues relating to the defence were noted at year end. The issuer was asked to provide explanations for the significant provision when there appeared to be no present obligation.
49.

FRS-15: Provisions, Contingent Liabilities and Contingent Assets says:

5.1

A provision must be recognised when:

1. an entity has a present obligation (legal or constructive) as a result of a past event;
2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

100. A reliable estimate can be made of the amount of the obligation.

If these conditions are not met, a provision must not be recognised.
50.

The Commission reminds issuers to ensure that all the conditions of FRS-15 paragraph 5.1 are met before any provision is recognised in the financial statements.

Classification of convertible instruments insufficiently clear
51.

One issuer was asked about the classification of convertible instruments in their financial statements. It was not clear whether the instruments were debt or not as they had not classified them as either current or non-current liabilities.
52.

Although companies in the past have sometimes relied on a "mezzanine type" presentation, more recently companies have moved to classify, and in many cases correctly classify, such instruments.
53.

Moreover, being uncommitted in the classification of such financial instruments does not help readers of financial statements to assess: "the nature amounts and liquidity of available resources as required under FRS-2 Presentation of Financial Reports.
54.

FRS-2 (para 8.5) requires all items in the Balance Sheet to be classified as either equity, asset (current or non-current), or liability (current or non-current).
55.

The Commission acknowledge that there are debates within the accounting profession about whether certain financial instruments, e.g. preference shares and convertible notes are debt or equity. The debate has been refocused because of available overseas GAAP in this area, and the move towards adoption of NZ IFRS.
56.

The Commission expects issuers to be guided by NZ GAAP, including relevant overseas guidance, when issuing new instruments, and to review any pre-existing arrangements and their current accounting treatment for such instruments in the light of any new guidance.

Non-disclosure of an actual versus prospective financial information comparison
57.

The Commission considers that the actual versus prospective financial information comparison disclosure requirement is important to give investors feedback on the relative reliability of prospective financial information, including reasons for variances which are subject to audit. This disclosure is not optional.
58.

In one instance the financial statements did not include a comparison of actual or prospective financial information when this was required. A comparison and explanations is required to be included by FRS-9 Information to be Disclosed in Financial Statements paragraph 5.4.
59.

FRS-9 says:

5.4

Where an entity has published prospective financial information other than prospective financial information expressed solely in general terms, for the period of the financial report, the entity shall present a comparison of the prospective financial information previously published with the actual financial results being reported. Explanations for major variations shall be given.
Lack of a total recognised revenues and expenses line in the Statement of Movements in Equity
60.

The format of the Statement of Movements in Equity (SoME) in many financial reports did not comply with NZ GAAP in that they did not disclose a total recognised revenues and expenses line.
61.

The Statement of Movements in Equity is a primary financial statement. FRS-2 Presentation of Financial Reports paragraph 7.1 indicates that one of the objectives of the Statement of Movements in Equity is as a measure of comprehensive income. To this end FRS-2 paragraph 7.3(a) requires disclosure of a total recognised revenues and expenses line in the Statement of Movements in Equity. Therefore this line should be disclosed in a Statement of Movements in Equity.
62.

Although all of the components making up total recognised revenues and expenses are disclosed in the Statement of Movements in Equity, meaning that a knowledgeable reader could calculate the figure, the Commission believes that it is important that the total recognised revenues and expenses figure is also disclosed.
63.

Six issuers had multiple figures making up total recognised revenues and expenses. However, even for other issuers where total recognised revenues and expenses only comprises Net Surplus, best practice is to disclose a total recognised revenues and expenses line in the Statement of Movements in Equity.
64.

Cycle 3 review found six instances where the Statement of Movements in Equity did not show the total recognised revenues and expenses line. The instances of non-compliance have not declined compared with Cycle 2.
65.

This issue is easy to remedy and the Commission expects issuers to adjust the format of the Statement of Movements in Equity to include the total recognised revenues and expenses line in future financial reports where this is necessary.

Failure to date the financial statements
66.

In Cycle 3 the instances of failure to date the financial statements as required by the Financial Reporting Act 1993 and Companies Act 1993 have decreased. One instance of non-compliance was found compared to 4 and 3 for Cycles 2 and 1 respectively. The Commission views the decrease in instances of non-compliance as a positive development.

Non-disclosure of a significant future commitment
67.

One issuer disclosed what appeared to be a significant commitment in their Chairman's report but not in their financial statements. Although the particular commitment may not be viewed as a capital commitment (which would require disclosure under FRS-9) for the financial statements to give a fair presentation, the issuer should have disclosed this commitment, given the significant amount involved.
68.

The Commission encourages issuers to consider whether significant commitments, other than those traditionally viewed as capital, need to be disclosed in their financial statements.

Accounting for an unconditional sale of properties
69.

Two issuers were asked whether there had been inappropriate early recognition of a purchase/sale of properties. The issuers had accounted for a purchase/sale of properties at the point when the unconditional contracts were signed but before the legal ownership had transferred.
70.

The Commission acknowledges that some parts of the accounting profession may view that accounting for a purchase when a contract is unconditional is acceptable. However, the Commission's view is that recognition should only occur when the risks and rewards of ownership have transferred, and this needs to be fully considered by issuers and their auditors. Prima facie this occurs when legal ownership transfers.
71.

IAS 18 Revenue (Appendix A, paragraph 9) deals with accounting for real estate sales. It states that:

Revenue is normally recognised when legal title passes to the buyer. However, in some jurisdictions the equitable interest in a property may vest in the buyer before legal title passes and therefore the risks and rewards of ownership have been transfrred at that stage.
72.

The Commission expects issuers to ensure that risks and rewards of ownership have transferred before recognising a purchase of properties.

Accounting treatment for recognition of reclaimed lands
73.

The Commission sought explanations from two issuers about their accounting for reclaimed land and whether or not such land should be classified as an asset.
74.

Satisfactory answers have been received from these issuers.

Minor Matters
75.

Various minor matters were identified which, although of lesser significance, warrant greater attention by those who prepare annual reports. Most of the matters are similar to those matters identified during Cycle 1 and 2. Details on these matters are available in the Cycle 1 and 2 reports.

Recurring minor matters
76.

The following matters have been recurring during the three cycle reviews.

77.

Financial instruments are not well addressed by a lot of issuers, possibly because most of the requirements of the FRS-31 are disclosure-related. The present requirements should be met by issuers, but the obligations in respect of financial instruments under NZ IFRS will require issuers to know what is required, particularly as recognition and measurement issues will be involved.

Miscellaneous matters
78.

Other comments raised for issuers to consider as part of the preparation of future financial statements. They were the need to:

1. provide reasons for an accounting policy change (FRS-1, para. 5.11);
2. either value inventories at lower of cost and net realisable value instead of at cost, or else clearly specify this in the accounting policy (FRS-4, para.5.1);
3. provide adequate disclosure for subsequent events (FRS-5, para. 6.5);
4. ensure that all financial information properly reconciles with a set of financial statements;
5. show the reconciliation of the balance of unamortised development costs at the beginning and end of the period ( FRS-13, para.5.19 (e));
6. review the period of amortisation for intangibles;
7. provide all disclosures in the financial statements for the period which an acquisition has occurred that has resulted in combination of entities or operations (FRS-36, para.6.2);
8. ensure consistency of disclosures relating to the percentage of shareholdings of subsidiaries in different notes of the financial statements; and
9. value a property previously held as an investment but is now intended to be sold, at carrying amount (SSAP-17, para 5.8).

Market Matters: NZX Referrals
79.

Three continuous disclosure regime matters in respect of three issuers were referred to NZX for consideration. The matters were:

1. an inaccurate continuous disclosure notice;
2. a delay in announcing audited results; and

100. a delay in announcing the signing of a major asset purchase contract.

80.

Timely and accurate announcements must be made for the continuous disclosure regime to be effective.

FOLLOW-UP FROM CYCLE 1
81.

Cycle 1 reported that the Commission was monitoring the reports of two issuers that had serious problems.
82.

In one of these matters no further action was taken because any action for breach of the Securities Act 1978 that may have been available would have been outside the limitation period for laying charges.
83.

On the second matter the Commission referred the auditor of the issuer to the New Zealand Institute of Chartered Accountants in the form of a complaint under the Rules of the Institute.

FOLLOW-UP FROM CYCLE 2
84.

At the end of the Cycle 2 Review three matters related to an issuer's prospectus required further investigation. The Commission has worked through these matters with the issuer and concluded that no further action is warranted.
85.

The matters investigated did highlight the need for issuers to exercise greater care in preparing a prospectus. The reasons for the further investigation were:

• discrepancies between key figures at the beginning of the prospectus and the figures that formed the basis of the cash flow prospective financial information; and
• incorrect assertions about the level of sales achieved at the end of a particular period.

INTERNATIONAL FINANCIAL REPORTING STANDARDS
86.

Issuers have three years within which they can to choose to switch to NZ IFRS. Issuers have until periods beginning on or after 1 January 2007 to make this change.
87.

As part of its surveillance programme the Commission will review NZ IFRS financial statements of a selection of issuers during this period. The first reviews are underway and are of NZ IFRS financial statements relating to the reporting period ended 31 December 2005.
88.

The aim of these early reviews is to gather information on the early implementation of NZ IFRS and enable the Commission, where appropriate, to provide feedback to later appliers of NZ IFRS. The Commission will seek to maintain an appropriate balance between education and enforcement during the initial adoption of NZ IFRS.
89.

Issuers are reminded of the two Practice Notes that the Commission has published dealing with IFRS policy expectations in respect of prospectuses. These are available on the Commission's website www.seccom.govt.nz:

1. Practice Note No 2/2005: Prospective financial information in offer documents prepared in periods prior to adoption of NZ IFRS in historical financial statements; and
2. Practice Note No 3/2005: Historical financial information in offer documents prepared in accordance with NZ IFRS.

90.

The Commission adopted NZ IFRS for the year ended 30 June 2006. A key lesson from this experience is not to underestimate the work required to assess the NZ IFRS disclosure requirements, including the consequential information requirements to support additional disclosures.

ONGOING REVIEW AND ENFORCEMENT
91.

The Commission will continue to review issuers' financial reporting as part of the Financial Reporting Surveillance Programme and to take any appropriate steps to encourage compliance with Financial Reporting Standards and other elements of NZ GAAP.