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Financial reporting surveillance programme cycle 4 [2007] NZSecCom 2 (31 May 2007)

Last Updated: 11 November 2014

REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 4
Financial Reporting Surveillance Programme

31 May 2007

CONTENTS

EXECUTIVE SUMMARY
INTRODUCTION
RESULTS OF THE REVIEW

Follow-up Action
Outcome of Matters Raised
FINDINGS UNDER NZ EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

Quality of explanation of transition to NZ IFRS
Share-based payment transactions not identified and not disclosed
The presence of a liability component in a convertible note
Common non-disclosures
FINDINGS UNDER PREVIOUS NZ GAAP

Non-consolidation of controlled entities
Prospective financial information and accounting policies
Omission of disclosures required by FRS-41
Lack of explanation of actual versus prospective financial information variances
Minor Matters
MARKET MATTERS: NZX REFERRALS
FOLLOW-UP FROM THIS CYCLE
FOLLOW-UP FROM OTHER CYCLES
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 4 the Commission reviewed the financial reports of 40 issuers with balance dates from 30 June 2005 to 31 March 2006. Nine of the 40 issuers had applied New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). As with previous Cycles, the purpose of the Cycle 4 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 4 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 4 findings were similar to the results of previous Cycles where the Commission noted few serious problems, but thought that a number of issuers should raise the standard of their financial reporting. Findings from issuers applying NZ IFRS are available for the first time since the Commission started the financial reporting surveillance programme in 2005. The Commission considers that the level of compliance with NZ IFRS for the early adopters was generally good. However, the Commission did find a number of common non-disclosures by many of these issuers.

Reports of 17 issuers of the 40 reviewed had matters that needed to be addressed. The Commission wrote to these issuers.

The key issues amongst the significant matters found were:

NZ IFRS

• quality of explanation of transition to NZ IFRS;
• share-based payment transaction not identified and not disclosed;
• the presence of a liability component in a convertible note.

Previous NZ GAAP

• non-consolidation of controlled entities;
• prospective financial information and accounting policies;
• omission of disclosures required by FRS-41; and
• lack of explanation of actual versus prospective financial information variances.

The Commission has used the term 'previous NZ GAAP' in this report to mean the basis of accounting that an issuer uses for preparing historical financial information before adopting NZ IFRS. The Commission acknowledges that previous NZ GAAP is still current for issuers that have not yet adopted NZ IFRS.

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 an issue relating to non-disclosure of a waiver in an annual report and the matter has been referred to NZX for their consideration.

The Commission will continue its financial reporting surveillance programme.

INTRODUCTION
1.

Financial reporting surveillance work is undertaken by securities regulators around the world including those in Australia, Europe, the UK and the US. One of the aims of this type of surveillance work is to ensure that there is a consistent application of accounting principles by issuers of securities in these capital markets. These securities regulators are also members of the International Organisation of Securities Commissions (IOSCO).
2.

IOSCO has recently set up an IFRS database enabling securities regulators to share decisions on the application of IFRS. This database provides a reference source for regulatory decisions. The Commission will contribute IFRS issues to this database.
3.

Information in this database will also be assessed by IOSCO, and where it reveals varying interpretations IOSCO intends referring these to the International Accounting Standards Board (IASB) or the International Financial Reporting Interpretation Committee (IFRIC) for consideration.
4.

In 2005, the Commission established a financial reporting surveillance programme to review financial reporting practices of issuers in New Zealand.
5.

The Commission's published report on surveillance work will provide market participants with the commission's findings from each review and give some guidance on the Commission's expectations of disclosures by issuers.

Financial Reporting Surveillance Programme
6.

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".
7.

As part of its work to carry out this function the Commission has established the financial reporting surveillance programme.
8.

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.
9.

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

a.

issuers' financial report disclosures are clear and comprehensive;

b.

investors can have confidence in the credibility of financial information provided by issuers; and

c.

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

Cycle 4 Review of Financial Reporting by Issuers
10.

In the fourth Cycle of the programme the Commission reviewed the financial reports of 40 issuers with balance dates from 30 June 2005 to 31 March 2006.
11.

The selection of 40 issuers was made up of:

a.

32 issuers listed on the NZX;

b.

6 issuers listed on the NZAX; and

c.

2 issuers whose shares are traded on Unlisted.
12.

The reports were reviewed against NZ GAAP. For the purpose of the Financial Reporting Act 1993, financial statements and group financial statements comply with GAAP only if those statements comply with:

a.

applicable financial reporting standards; and

b.

in relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that:

i.

are appropriate to the circumstances of the reporting entity; and

ii.

have authoritative support within the accounting profession in New Zealand.
13.

The term "applicable financial reporting standard" is defined in the Financial Reporting Act 1993 to mean an approved financial reporting standard that applies to that reporting entity (or the group) and to that accounting period in accordance with a determination of the Accounting Standards Review Board (ASRB) for the time being in force or any election made under section 27 of this Act.
14.

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

a.

the level of compliance with NZ GAAP by issuers in their financial statements prepared under the Financial Reporting Act 1993;

b.

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

c.

the overall quality of financial reporting practices by issuers.
15.

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.
16.

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

RESULTS OF THE REVIEW
17.

As with the previous Cycles few serious problems were identified in the Cycle 4 review but some issuers should raise the standard of their financial reporting.
18.

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

Follow-up Action
19.

In Cycle 4, reports of 17 issuers had matters that the Commission considered should be addressed. Letters were sent to these 17 issuers asking them to clarify matters, and/or to address specific shortcomings when preparing their next financial reports.
20.

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

a.

appears to be wrong;

b.

does not appear to make sense;

c.

is not clear and lacks transparency;

d.

seems unusual or irregular;

e.

raises questions about its validity; or

f.

has insufficient explanation.
21.

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 had the issuer's original disclosure been clearer or more transparent.
22.

In the letters on significant matters any minor matters were also drawn to the attention of the issuer. Our policy is that we do not write to issuers whose reports raised only minor matters other than if the number of minor matters is so numerous that, taken together, their effect is potentially significant with regard to the integrity of the financial statements.
23.

In each case a copy of the letter was also sent to the issuer's auditor. This practice acknowledges the role that auditors have in helping to maintain and improve the standard of financial reporting in New Zealand. 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.

Outcome of Matters Raised
24.

Thirty-three percent of the matters raised in letters to issuers were viewed by the Commission as significant.

The Commission's definition of a "significant" matter is in paragraph 20 above.
25.

Table 2 shows the outcome of matters raised with issuers.

Table 2: 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 subsequent 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.

26.

Satisfactory agreement was reached with issuers on 85% of significant matters raised. Three significant matters are being followed up separately.
27.

It is encouraging to see that the number of instances of failure to date and/or sign the financial report had decreased. The Cycle 4 review found only one instance of such non-compliance.

28.

The number of instances of failure to disclose the total recognised revenues and expenses lines in the Statement of Movement in Equity had also decreased. Cycle 4 review found only two instances of this non-compliance.

29.

Apart from the matters noted in paragraphs 27 to 28 above, other significant matters noted are generally of a different nature from those in previous Cycles.
30.

We have split feedback of our findings into:

(a)

findings under NZ IFRS;

(b)

findings under previous NZ GAAP; and

(c)

market matters: NZX referrals

For the purposes of this report, the Commission has used the term 'previous NZ GAAP' to mean the basis of accounting that an issuer uses for preparing historical financial information before adopting NZ IFRS.

FINDINGS UNDER NZ EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
31.

Issuers have three years within which they can choose to adopt NZ IFRS. Issuers have until periods beginning on or after 1 January 2007 to make this change.
32.

As part of Cycle 4 the Commission reviewed nine NZ IFRS financial statements. This is the first review of NZ IFRS financial statements and they relate to the reporting period ended 31 December 2005 to 31 March 2006.
33.

The aim of these reviews is to gather information on the early implementation of NZ IFRS and enable the Commission, where appropriate, to provide feedback to later adopters of NZ IFRS. The Commission will seek to maintain an appropriate balance between education and enforcement during the initial adoption of NZ IFRS.
34.

The Commission considers that the level of compliance with NZ IFRS for the early adopters was generally good. However, it did find a number of common non-disclosures by many of the NZ IFRS issuers. These relate primarily to disclosures required by NZ IAS 1 Presentation of financial statements, which are discussed below at paragraph 59.
35.

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.

36.

The significant matters found from reviewing financial statements prepared using NZ IFRS were:

a.

quality of explanation of transition to NZ IFRS;

b.

share-based payment transaction not identified and not disclosed;

c.

the presence of a liability component in a convertible note; and

d.

common non-disclosures.

Quality of explanation of transition to NZ IFRS
37.

In Cycle 4, all entities applying NZ IFRS for the first time included reconciliations required under NZ IFRS 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards. These reconciliations explained how the transition from previous GAAP to NZ IFRS affected reported financial position, financial performance and cash flows.
38.

The Commission reminds issuers that only adjustments arising from applying NZ IFRS for the first time should be included in the reconciliations required under NZ IFRS 1.
39.

The Commission is of the view that all other adjustments, including those arising from correction of prior period errors or change in accounting estimates must be disclosed as a separate note. For example, such changes could be included in the statement of changes in equity note as required by NZ IAS 1 paragraph 97.
40.

Separate disclosure ensures that readers are not confused as to the reasons for the adjustments.
41.

An entity's explanation of transition to NZ IFRS should be sufficiently clear so that a reader is able to understand the changes and their financial impact from reading the financial statements.
42.

The Commission noted instances where it is not clear whether the adjustments included in the entity's NZ IFRS 1 transition explanation were in fact arising from a change in accounting policies on adoption of NZ IFRS.
43.

The Commission noted one entity had incorrectly included adjustments arising from correction of prior period errors in the same note that was seeking to explain the impact of NZ IFRS as a result of their transition from previous NZ GAAP to NZ IFRS as required by NZ IFRS 1.
44.

Through the review of the issuer's NZ IFRS 1 transition explanation the Commission noted the entity had not applied FRS-36: Accounting for Acquisitions Resulting in Combinations of Entities or Operations (FRS-36) in the financial year immediately before its adoption of NZ IFRS in relation to its accounting for a reverse acquisition transaction.
45.

The entity concerned incorrectly presented this adjustment as a change in accounting policies arising on adoption of NZ IFRS, specifically NZ IFRS 3 Business Combination (NZ IFRS 3), in the opening and closing consolidated balance sheet of the comparative year, when it was a correction of a prior period error.
46.

The Commission believe that the disclosure of the change as a transition adjustment created an incorrect view of the adjustment in the entity's current year's consolidated financial statements as readers would be given the impression that the adjustments had arisen due to differences in accounting policies between previous NZ GAAP and NZ IFRS, when in fact it was a correction of prior period error.
47.

The Commission is of the view that had the reverse acquisition been correctly accounted for under FRS-36 it would not have given rise to a transition adjustment to equity on transition to NZ IFRS.
48.

The entity agrees with the Commission's position but states that it was common practice to account for reverse acquisitions using 'conventional acquisition accounting'.
49.

The Commission is concerned that 'common' accounting practices exist that do not comply with the principles set out in an approved financial reporting standard, in this case FRS-36.
50.

The guidance in FRS-36 as to the identification of the investor in an acquisition transaction and its accounting treatment is sufficiently similar to that set out in NZ IFRS 3 (Appendix B).
51.

The Commission reminds issuers who have entered into reverse acquisition transactions to review their accounting and ensure that they meet the principles and requirements under FRS-36.
52.

The Commission also urges issuers who have incorrectly accounted for any reverse acquisition transactions under previous NZ GAAP to clearly distinguish these corrections from adjustments that have resulted from a change in accounting policy arising from the adoption of NZ IFRS.
53.

The Commission acknowledges that a great deal of effort has gone into NZ IFRS transition but reminds entities to be more thorough in their assessment of the key differences in accounting policies between NZ IFRS and previous NZ GAAP to avoid confusing them with adjustments arising from correction of prior period errors and changes in accounting estimates.
54.

The Commission reminds entities to clearly identify and explain the key changes arising from differences in accounting policies between NZ IFRS and previous NZ GAAP.

Share-based payment transactions not identified and not disclosed
55.

The Commission noted one entity had overlooked that a transaction was a share-based payment transaction within the scope of NZ IFRS 2 Share-based Payment (NZ IFRS 2) and failed to disclose the transaction and the accounting policy describing the measurement of this transaction.
56.

The Commission reminds preparers of financial statements to review all business transactions to ensure that any share-based payment transactions within the scope of NZ IFRS 2 are identified and disclosed.

The presence of a liability component in a convertible note
57.

The Commission noted one entity had overlooked separately classifying the equity and liabilities component in a convertible note. This separate classification is required under NZ IAS 32 Financial Instruments: Presentation (NZ IAS 32).
58.

The Commission reminds issuers to evaluate the terms of the financial instruments to determine whether it contains both a liability and an equity component and to separately classify those components as financial assets, financial liabilities or equity instruments in accordance with the substance of the arrangement and the definitions of a financial liability, a financial asset and an equity instrument set out in NZ IAS 32.

Common non-disclosures
59.

The Commission noted several common non-disclosures by entities applying NZ IFRS:

NZ IAS 1 Presentation of Financial Statements

• a statement as to whether an entity is a profit-oriented entity or a public benefit entity (NZ IAS 1: NZ13.1(b));
• a statement that the financial statements have been prepared in accordance with NZ GAAP, together with a description of the financial reporting standards applied by that entity (NZ IAS 1: NZ13.1(d));
• for an entity whose financial statements comply with IFRS, an explicit and unreserved statement of such compliance in the notes (NZ IAS 1.14);
• each component of the financial statements to be identified clearly, in particular, the name of the reporting entity or other means of identification, which has to be repeated if necessary (NZ IAS 1.46(a));
• entity's presentation currency and the level of rounding used in presenting amounts in the financial statements (NZ IAS 1.46(d) and (e));
• a statement, in the summary of significant policies or other notes, about the judgements, apart from those involving estimations, management has used in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements (NZ IAS1.113); and
• key assumptions concerning the future and other key sources of estimation uncertainty at the balance date that have significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year (NZ IAS 1.116).

NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

• disclosure of a new NZ IFRS and/or new New Zealand Equivalents to IFRIC Interpretations (NZ Interpretations) which had been issued but not yet effective, that the entity had not applied (NZ IAS 8.30).

60.

Many issuers omitted some of the above required disclosures and one issuer omitted all of the above required disclosures. The Commission considers that all the above disclosures should be made as a matter of course in adopting NZ IFRS.
61.

The Commission expects the judgements management have applied in financial reporting, including key assumptions and estimates, and their effects on accounting policy choices be disclosed in the financial statements. A one-line statement that management had applied judgements and made estimates about the future is not sufficient to meet the requirements under NZ IAS 1 paragraphs 113 and 116. Generic disclosures are not useful to readers of financial statements.
62.

Key assumption and estimate disclosures are very important disclosures particularly for organisations with complex operations. The Commission believes that it is good business practice that the Boards of entities consider the assumptions and estimates that have a significant risk of causing material adjustment in the carrying amount of assets and liabilities before finalising the financial statements. It is the intention of NZ IAS 1 that entities disclose these assumptions and estimates that require management's subjective or complex judgements. NZ IAS 1 also requires entities to disclose the nature of assets and liabilities affected by key assumptions and estimates together with their carrying amount as at the balance date.
63.

As stated in paragraph 22, the Commission's policy is to write to issuers whose reporting raises matters of significance. When the Commission writes to these issuers it also includes details of other minor matters that it found.
64.

Minor matters identified and raised with issuers applying NZ IFRS are:

NZ IAS 1 Presentation of Financial Statements

• the omission of an accounting policy for contingent consideration relating to the acquisition of an associate;
• the non-disclosure of the monetary amount for shares issued during the year;

NZ IAS 7 Cash Flow Statements

• the appropriateness of reconciling operating profit before financing costs with cash generated from operations rather than presentation of a reconciliation of operating profit after taxation with net cash flows from operations;

NZ IAS 10 Events after the Balance Sheet Date

• the treatment of certain transactions relating to performance targets being achieved by associates during the year as non-adjusting events when it appeared that the conditions for the events existed at balance date;

NZ IAS 16 Property, Plant and Equipment

• the non-disclosure of certain information relating to revalued properties and the appropriateness of the use of "open market existing use basis" in place of fair value for valuing properties;

NZ IAS 31 Interests in Joint Ventures -

• the inconsistent treatment of joint ventures with the corresponding disclosed accounting policy;

NZ IAS 32 Financial Instruments: Presentation

• the non-disclosure of redeemable preference shares in the financial statements;
• the non-disclosure of an interest rate swap facility;
• the non-disclosure of the significant terms and conditions affecting the amount, timing, and certainty of cash flows;

NZ IAS 36 Impairment of Assets

• the non-disclosure of reversals of impairment losses recognised in the period in the segment report;
• the non-disclosure that goodwill allocated to cash generating units is not material;

NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets

• the appropriateness of certain provisions relating to managed properties;
• the non-disclosure, for each class of provision, of the nature of the obligation, the expected timing of any resulting outflows of economic benefits, uncertainties about the amount or timing of the outflows and information related to any expected reimbursements;

NZ IAS 38 Intangible Assets

• the non-disclosure of the remaining amortization period for certain intangible assets;

NZ IAS 41 Agriculture

• the non-disclosure, in the reconciliation of changes in the carrying amount of biological assets between the beginning and end of the current period, of increases due to purchases, decreases due to harvest, increases due to business combinations and net exchange differences.

65.

Many of these issues have been resolved with issuers or are under discussion with the issuers. The Commission is pleased that many issuers acknowledged the comments that the Commission has made and have resolved to address particular matters in their subsequent annual reports.
66.

To be useful, the accounting policies stated should be relevant, specific and targeted at the operations and transactions that the company undertakes.
67.

Other than more detailed disclosures in many of the Standards that already exist in New Zealand, NZ IFRS also contains Standards in some areas previously not included specifically in separate New Zealand Standards. Issuers are advised to be aware of new or extended disclosures in areas such as intangible assets, impairment testing, related party disclosures, share based payments, income tax and financial instruments.

FINDINGS UNDER PREVIOUS NZ GAAP
68.

The significant matters found from reviewing financial statements prepared using previous NZ GAAP were:

• non-consolidation of controlled entities;
• prospective financial information and accounting policies;
• omission of disclosures required by FRS-41; and
• lack of explanation of actual versus prospective financial information variances.

Non-consolidation of controlled entities
69.

The Commission noted one entity had not consolidated a subsidiary that is within the scope of FRS-37: Consolidating Investments in Subsidiaries (FRS-37). The entity acknowledged that consolidation will be required and the controlled entities will be consolidated under NZ IFRS. The Commission is of the view that the controlled entity under NZ IFRS is also a subsidiary under FRS-37 and should have been consolidated under previous NZ GAAP.

Prospective financial information and accounting policies
70.

The Commission noted one entity had prepared prospective financial information for inclusion in a prospectus using an acquisition method that is prohibited by FRS-36: Accounting for Acquisitions Resulting in Combination of Entities or Operations.
71.

The Commission reminds issuers who include prospective financial information in prospectuses that prospective financial statements should be prepared in accordance with the accounting policies expected to be used in the future for reporting historical general purpose financial statements. This requirement is set out in FRS-42: Prospective Financial Statements (FRS-42). FRS-42 was issued in December 2005 and supersedes FRS-29: Prospective Financial Information.

Omission of disclosures required by FRS-41
72.

The Commission analysed the FRS-41: Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards (FRS-41) disclosures for Cycle 4 issuers that were required to make these disclosures. Only one issuer had overlooked this disclosure in their financial statements. All other issuers have made some form of disclosure about their transition to adopt NZ IFRS, some more informative than others.
73.

The percentage of issuers under review that either did not disclose any information about adoption of NZ IFRS or made disclosures that only partially complied with FRS-41 had improved (30% in Cycle 4 compared to 54% in Cycle 3).
74.

Some disclosures about progress with the transition to NZ IFRS did not include an explanation of how the transition to NZ IFRS is being managed, for example, a description of an entity's plans and progress with its transition project.
75.

Given that the date of transition to NZ IFRS is imminent, it is surprising to note the number of entities that have not yet identified the impact of adopting NZ IFRS or not yet undertaken any formal exercise to identify the impact.
76.

These disclosures are very important as they provide an opportunity for issuers to signal to the market the likely impact of adoption of NZ IFRS and it also enables comparability with other entities who have adopted NZ IFRS. There is an expectation that if an issuer has some NZ IFRS numbers, the issuer should disclose them. FRS-41 requires known or reliably estimable information about the impact to be disclosed. FRS-41 states that reliable estimation is impracticable when it cannot be performed after making every reasonable effort to do so.
77.

The Commission reminds issuers that they have to ensure that any disclosure statement made to comply with FRS-41 should meet the objectives set out in the Standard.
78.

The objective of FRS-41 is to require issuers to disclose the impacts of adopting NZ IFRS including:

(a)

information in respect of planning for the transition to NZ IFRS;

(b)

key differences in accounting policies expected to arise on adoption of NZ IFRS; and

(c)

known or reliably estimable information about the impacts on the financial reports had the financial reports been prepared using NZ IFRS.
79.

FRS-41 also requires that, if the key differences in accounting policies that are expected to arise from adopting NZ IFRS or their quantitative information is not known, a statement to that effect should be made. A few entities had overlooked this disclosure.
80.

Disclosures about the impact of adopting NZ IFRS should be included and form part of the financial statements, regardless of whether this information is also disclosed elsewhere in the annual report.

Lack of explanation of actual versus prospective financial information variances
81.

The lack of explanation of actual versus prospective financial information variances has been a recurring issue over the financial reporting surveillance reviews.
82.

In Cycle 4, the Commission noted one entity included a comparison of actual or prospective financial information, but did not explain the major variances between prospective financial information and the actual results that had been disclosed as required by FRS-9 Information to be Disclosed in Financial Statements paragraph 5.4.
83.

FRS-9 states:

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.
84.

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.

Minor Matters
85.

The Commission writes to issuers whose reporting raises matters of significance. When the Commission writes to these issuers it also includes details of other minor matters that it found.
86.

Minor matters identified and raised with issuers applying previous NZ GAAP are:

FRS-3: Property, Plant and Equipment

• non-disclosure of the bases and any significant assumptions or limiting conditions of the valuation;

FRS-9: Information to be Disclosed in the Financial Statements

• very high percentage of operating revenue was not explained and omitted from analysis in the Notes;
• retained profits brought forward and dividend paid was presented in the Statement of Financial Performance following net surplus after taxation.

SSAP-22: Related Party Disclosures

• a lack of detail about the identity of the related parties for which there have been transactions;
• a lack of disclosure about the terms of settlement of related party balances;
• a lack of disclosure about balances outstanding at balance date.

FRS-30: Reporting Share Ownership Arrangements including Employee Share Ownership Plans (ESOP)

• a lack of disclosure of those entitled to participate in the ESOP;
• a lack of disclosure of the mechanism establishing the price at which shares are allocated.

FRS-31: Disclosure of Information about Financial Instruments

• a lack of disclosure concerning credit risk;
• a lack of disclosure concerning fair values.

FRS-33: Disclosure of Information by Financial Institutions

• a lack of disclosure about impaired assets and provisions; and
• a lack of disclosure concerning credit exposure.

87.

The Commission is pleased that many issuers acknowledged the comments that the Commission made and have resolved to address particular matters in their subsequent annual reports.
88.

The nature of many of the matters raised with issuers indicates that issuers should pay greater attention to detail in complying with financial reporting disclosures (e.g. disclosures in respect of significant accounting policies, financial instruments, employee share ownership plans and related party disclosures). Issuers should also make sure that the financial statements provide a true and fair view.

MARKET MATTERS: NZX REFERRALS
89.

One entity had overlooked the disclosure of a waiver in its annual report and this matter was referred to NZX for consideration. The issuer had subsequently remedied this non-disclosure. The Commission stresses the need for issuers to have processes in place to ensure waivers are disclosed in the annual report if that was a condition of the waiver.
90.

The Commission brought two matters in relation to non-disclosure of waivers to the NZX Discipline Special Division. Further review revealed the first of these matters had been satisfactorily disclosed and on the other matter the issuer will ensure that the waiver is referred to in its next annual report.

FOLLOW-UP FROM THIS CYCLE
91.

At the date of publication of this report there are a number of matters that require further follow up action and the Commission may refer these to the relevant authorities.
92.

To date correspondence with the issuers has failed to resolve the matters to the satisfaction of the Commission.

FOLLOW-UP FROM OTHER CYCLES
93.

The Commission has just received details of a final determination from NZICA regarding a complaint the Commission made in respect of the auditor of an issuer we reviewed as part of Cycle 1. The Commission is still considering the result and whether any other action is warranted.
94.

The Commission has made a further complaint to NZICA relating to NZICA members' involvement in the preparation and audit of financial statements of a publicly listed company.

ONGOING REVIEW AND ENFORCEMENT
95.

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.

* * * * *