Financial reporting aurveillance programme. Review of financial reporting by issuers Cycle 11 [2010] NZSecCom 6 (1 May 2010)

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EXECUTIVE SUMMARY .................................................................................................................. 1

INTRODUCTION................................................................................................................................. 3

CYCLE 11 FINDINGS ......................................................................................................................... 4

Scope and issuer selection ................................................................................................... 4

Overall comments on Cycle 11............................................................................................ 4

Outcome of matters raised .................................................................................................. 5

Specific comments on Cycle 11 findings ............................................................................ 5

Financial instrument disclosures ................................................................................................. 6

Statement of compliance with IFRS ............................................................................................. 8

Related party information ............................................................................................................. 8

Impairment of non-financial assets ..............................................................................................9

Description of non-audit services provided ................................................................................ 10

Valuation of property, plant and equipment .............................................................................. 10

Miscellaneous matters ................................................................................................................. 10

Market matters................................................................................................................... 11

Substantial security holders ........................................................................................................ 11

Directors’ interests and share dealings ...................................................................................... 11

Auditors’ reports.......................................................................................................................... 12

CONCLUSION ................................................................................................................................... 13

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL REPORTING SURVEILLANCE PROGRAMME ......................................................................... 14

The Commission’s Financial Reporting Surveillance Programme ............................... 14

New Zealand Generally Accepted Accounting Practice ................................................. 15

Selecting issuers.................................................................................................................. 15

Identifying matters and taking action .............................................................................. 16

The Financial Reporting Surveillance Programme (FRSP) is designed to encourage high- quality financial reporting that will enhance the credibility of financial information provided by issuers and, therefore, strengthen investor confidence.

The purpose of this report is to educate directors, chief financial officers and other financial statement preparers, auditors and financial analysts on areas where the New Zealand Securities Commission considers financial reporting could, and should, be improved.

While the Commission views its FRSP as educational, if during the review a matter is identified which may require enforcement action, it is removed from the FRSP and immediately considered as an enforcement matter. Any such follow up action is not included within this report.

In general, our review reflects a level of compliance with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) that is appropriate for a developed capital market like New Zealand. However, there is still room for issuers to improve their compliance with NZ IFRS to ensure greater transparency in the New Zealand market. When matters are raised with them, many market participants agree. This is reflected in the high percentage of agreement reached¹with issuers on matters raised.

The results from Cycle 11 show a consistent series of technical breaches in financial reporting areas which the Commission has highlighted in its earlier news releases and public reports. To supplement this report, in the areas where issues are repeatedly being raised with issuers, the Commission intends to develop a wide public education programme. The Commission proposes to hold workshops for this purpose.

The Commission wrote to 20 of the 24 issuers reviewed. The main matters raised related to: (a) financial instruments, in particular inadequate or incorrect disclosure of credit risk

(b) statement of compliance with IFRS, in particular the non-disclosure of an explicit and unreserved statement of compliance with IFRS;

(c) related party information, including omissions from key management personnel compensation disclosures and the non-disclosure of consideration used to settle related party transactions;

(d) impairment of non-financial assets, in particular inadequate disclosure of assumptions underlying goodwill impairment testing;

(e) non-audit services provided by auditors, in particular the non-disclosure of the nature of those services; and

(f) valuation of property, plant and equipment, in particular inadequate disclosure of the specific assumptions underlying such valuations.

¹This comprises issues that were resolved through clarification by issuers and commitment by issuers to further disclose identified matters in their future financial statements.

Of matters identified as part of this review, the Commission has decided to refer two matters to appropriate bodies for their consideration. No other matters warranted the Commission taking any enforcement action or making any referrals to any appropriate body.

NZ IFRS is increasingly becoming more principle-based. In addition, many NZ IFRS require information to be presented from the perspective of management. Where these involve estimates and judgement, disclosure of the basis underlying such estimates and judgement is necessary to provide a critical context to the accounting numbers. The Commission urges issuers and their directors to take up the challenge of correctly applying the principles underlying NZ IFRS and to assume full responsibility for the transparency of their financial statements.

1. This report sets out findings from Cycle 11 of the Commission’s ongoing Financial

Reporting Surveillance Programme (FRSP) and covers entities with balance dates from

2. Appendix 1 sets out the programme’s background, including how the Commission selects issuers for review, and deals with any issues it identifies.

3. This report is intended to educate directors, chief financial officers and other financial statement preparers, auditors and financial analysts on areas where the New Zealand Securities Commission considers financial reporting could, and should, be improved. These areas are based on the findings of Cycle 11 of the Commission’s FRSP in which the Commission reviewed the annual reports of 24 issuers with balance dates from

4. The FRSP is primarily an educational programme, but it can result in enforcement actions. If a matter is identified during the course of FRSP which may warrant enforcement, then it is removed from the FRSP and immediately considered as an enforcement matter. The Commission does not provide details of any such follow up action within this report. Details of enforcement actions are provided by the Commission at the appropriate stage of the enforcement process.

5. In news releases and public reports in 2009 we indicated the areas on which the Commission would focus its FRSP reviews. These areas of focus are similar to those identified by a number of overseas jurisdictions as problem areas, particularly in the current environment:

(a) disclosure of significant assumptions relating to revaluations of assets; (b) impairment of assets and the associated disclosures;

(e) related party information, in particular, key management personnel compensation

6. The Commission reviewed the annual reports of 24 issuers with balance dates from

8. The results from Cycle 11 show a consistent series of technical breaches in financial reporting areas which the Commission has highlighted in its earlier news releases and public reports. Our purpose in raising matters with issuers and in reporting on our FRSP findings is to provide issuers and their auditors with the areas where we consider financial reporting could, and should, be improved. The Commission considers that there is a need for more public education to supplement this report, and propose to run workshops covering the areas where issues are being raised.

(a) financial instruments, in particular inadequate or incorrect disclosure of credit risk and interest rate sensitivity;

(b) statement of compliance with IFRS, in particular the non-disclosure of an explicit and unreserved statement of compliance with IFRS;

(c) related party information, including omissions from key management personnel compensation disclosures and the non-disclosure of consideration used to settle related party transactions;

(d) impairment of non-financial assets, in particular inadequate disclosure of assumptions underlying goodwill impairment testing;

(e) non-audit services provided by auditors, in particular the non-disclosure of the nature of those services; and

(f) valuation of property, plant and equipment, in particular inadequate disclosure of the specific assumptions underlying such valuations.

10. The letters to the 20 issuers drew their attention to a total of 34 matters raised and

Notes	Table 1: Outcome of matters raised Outcome	Matters raised ²	%
(1)	Resolved	9
(2)	Point taken/change agreed	20
	*Agreement reached*	29	85%
(3)	Second letter sent	1
(4)	Other follow-up action	4
		5	15%
	Total matters raised	34	100%

(2) Point taken/change agreed: the issuer acknowledged the point made and/or agreed to make changes in subsequent financial statements.

(3) Second letter sent: a second letter reiterated the points made and closed the matter.

(4) Other follow-up action: more action required e.g. a request in writing for answers to further questions; or a referral to another body such as the National Enforcement Unit of the Companies Office for consideration of enforcement action

11. Some issuers explained and clarified matters raised. In many other cases, issuers agreed, as a result of the Commission raising an issue, to make changes to their next set of financial statements. Notwithstanding this, our preference is for issuers and their directors to take full responsibility for correctly applying NZ IFRS in the first place and to ensure that their financial statements contain all the necessary information for users of their financial reports to make informed decisions.

12. The findings from Cycle 11 show a number of technical breaches in financial reporting which are consistent with previous cycles. The Commission has highlighted all of these areas in its earlier news releases and public reports.

13. The number of instances of the same issue being raised is evidenced by statistics for matters raised with issuers in our last three Cycles (see Figure 1). These issues are discussed in further detail below.

14. In 2009 the Commission undertook three Cycles (Cycles 9 to 11) of the FRSP and reviewed a total of 68 issuers’ annual reports. All of these annual reports were prepared after the issuers had adopted NZ IFRS.

²Matters raised exclude instances where the Commission wrote directly to audit firms and/or directors of issuers.

15. The Commission wrote to 54 issuers over these three Cycles. The number of matters raised, including market matters totalled 108. Of these 108 matters raised, 73 (68%) related to seven common financial reporting issues.

Figure 1: Top Matters Raised from Cycles 9 to 11 (post IFRS implementation)

16. Our findings suggest that the reporting of financial instruments is the most difficult area of reporting for issuers. Many instances of inadequate or incorrect disclosures in financial statements continue to be identified.

17. Financial instruments include financial assets and financial liabilities. Examples of financial assets include cash, shares in other entities, trade receivables and derivatives that are “in the money”. Financial liabilities include trade payables, loans received, and derivatives that are “out of the money”.

18. Financial instrument disclosures are important because they allow users to assess the liquidity, market risk and credit risk of an entity’s financial instruments.

19. We encourage directors, other preparers, and auditors to review their issuer’s disclosures and consider whether they comply with NZ IFRS, are understandable and transparent, and provide meaningful information to users of their financial reports.

³See article in the March 2010 issue of the New Zealand Institute of Chartered Accountants’ Journal by

21. NZ IFRS 7 requires all entities to disclose concentrations of risk arising from financial instruments where it is not apparent from the disclosures already provided (paragraph 34(c)).

22. One main contributor to the significant loan impairments of property finance companies has been high levels of subordinated lending in their loan portfolios. Therefore, in addition to the specifically required disclosure of credit risk concentrations by geographic, industry and counterparty, financial institutions should consider information on credit risk concentrations by security type. Where an issuer is a subordinated lender for significant portions of its loans and advances this information is likely to be material and must be provided.

23. In Cycle 11 one issuer provided such an analysis. We also noted that another issuer had provided an analysis by security type in its prospectus but outside of its financial statements. Where such information provided is material, it should be included within the financial statements and be subject to audit.

24. As part of the Commission’s correspondence with one issuer, the Commission questioned the accuracy of the interest rate sensitivity analysis disclosures in a note to the issuer’s financial statements. The issuer subsequently confirmed that the interest rate sensitivity analysis was overstated. i.e. reflected a more negative position if interest rates rose and a more positive position if interest rates dropped.

25. In this case, the Commission took no further action as the error reflected a hypothetical situation and did not affect the core financial statements.

26. We also note that this information had been provided to the issuer by a third party.

However, this does not relieve the issuer of their obligation to ensure their disclosures are accurate. This error should have been picked up through the annual report review process and highlights the need for preparers, directors and auditors to fully understand all disclosures being made.

27. In March 2009 the International Accounting Standards Board issued Improving Disclosures about Financial Instruments (Amendments to IFRS 7). The amendments require enhanced disclosures about fair value measurements and liquidity risk and are effective for annual periods beginning on or after 1 January 2009.

28. The amendments inter alia establish a three level hierarchy for fair value measurements based on the subjectivity of the inputs used in making the measurements. All entities are required to disclose, for each class of financial instruments recognised at fair value in the statement of financial position, the level in this hierarchy in which fair value has been determined.⁴Specific disclosures are also required for valuations using non- observable inputs.

29. Important changes have also been made to the application guidance⁵in respect of liquidity risk which include:

(a) reiterating that entities must disclose summary quantitative data about their exposure to liquidity risk on the basis of information provided internally to key management personnel;

(b) clarifying the treatment of loan commitments, financial guarantee contracts and derivatives for the required contractual maturity analysis of financial instruments; and

(c) requiring all entities to disclose a maturity analysis of financial assets held for managing liquidity risk where this is relevant to assessing its liquidity risk.

30. The Commission considers that these disclosures are particularly important for improving the transparency in the valuation of financial instruments and assessing liquidity risk. The application of these amendments will be a specific area of focus in the Commission’s upcoming reviews.

31. Fifteen of the 68 entities (22%) reviewed in Cycles 9 to 11 (4 of 24 issuers in Cycle 11) failed to include an explicit and unreserved statement of compliance with IFRS in their financial statements as required by NZ IAS 1 Presentation of financial statements (paragraph 16).

32. The Commission expects a statement such as “these financial statements comply with International Financial Reporting Standards” to be disclosed to ensure the requirements of NZ IAS 1 are met. The Commission reiterates that a statement such as “compliance with NZ IFRS ensures compliance with IFRS” is not an explicit and unreserved statement of compliance. The unreserved statement of compliance underlies New Zealand’s move to adopt IFRS and will enhance the confidence of overseas investors that New Zealand issuers have adopted an internationally recognised basis of

33. Issuers must give careful consideration to the preparation of related party disclosures.

The Commission continues to find that disclosures in this area need improvement.

34. NZ IAS 24 (paragraph 17) requires, at a minimum, certain disclosures to be made where there are transactions between related parties. Paragraph 17(b) requires disclosure of the amount of outstanding balances, along with their terms and conditions, including whether they are secured, the nature of the consideration to be provided in settlement and details of any guarantees given or received.

⁶This matter was discussed in detail in the Commission’s public report for Cycle Seven of the Financial

35. The Commission wrote to an issuer in respect of a related party transaction that was not disclosed as such in their financial statements. The transaction involved a company with common directors to the issuer and that had resulted in an increase in the issuer’s profit.

36. The issuer has attributed the error to a breakdown in its financial reporting controls.

37. The Commission considered that prosecution action was not appropriate for this matter but has referred the relevant individuals to the New Zealand Institute of Chartered Accountants.

38. In Cycle 11, the Commission wrote to one issuer who failed to disclose the nature of the consideration provided by the related party to the issuer to settle a transaction as required by NZ IAS 24 (paragraph 17).

39. The consideration in this case was in the form of equity securities in unlisted entities. In the case where a non-cash asset is used to settle a transaction, the fair value of the non- cash item will usually need to be established and should be disclosed as the consideration to be provided in settlement.

40. As a result of the Commission raising the matter, the issuer has made amendments to its current prospectus.

41. Transactions with related parties may or may not be at arms’ length. It is important that the terms and conditions of outstanding balances with related parties be disclosed to give users an indication of the impact of those transactions on the financial statements. The Commission also reminds issuers that a statement to the effect that all related party balances are on normal commercial terms can only be made if such terms can be substantiated (NZ IAS 24, paragraph 21).

42. NZ IAS 24 Related party disclosures (paragraph 16) requires disclosure of key management personnel compensation in total and for each of the specified categories.

43. As part of Cycle 11 the Commission continued to find errors in key management personnel compensation disclosures, and wrote to two issuers who omitted directors’ fees and share-based payments from their disclosures.

44. Recent economic conditions resulted in many entities having to write down the value of goodwill. In many cases the recession has caused significant revaluation of assets, but too often investors are not being given enough information to make informed judgements on whether a revaluation is fair.

⁷See article in the December 2009 issue of the New Zealand Institute of Chartered Accountants’ Journal by Lay

45. As part of Cycle 11, the Commission wrote to one issuer about their impairment testing of goodwill. Our enquiries related to the appropriateness of the growth rate assumption being based on cash flow forecasts derived from the most recent financial budgets approved by management for the next ten years.

46. NZ IAS 36 Impairment of assets requires an issuer to provide an explanation of why a period of greater than five years is justified for projected cash flows based on financial budgets/forecasts approved by management (NZ IAS 36, paragraph 134(d)(iii)).

47. The issuer has agreed to disclose this justification in their next financial statements. Description of non-audit services provided

48. We identified three entities that had failed to disclose the nature of non-audit services received from their auditors. We note that, while entities usually disclose fees paid by the required categories, some do not describe the nature of those services as required by NZ IAS 1 (paragraph NZ105.1).

49. The requirement is designed to increase the transparency of the auditor-issuer relationship enabling readers of the annual report to make their own judgement over the level of independence between the auditor and the issuer.

50. In Cycle 11 the Commission wrote to four issuers about valuation of their property, plant and equipment. NZ IAS 16 Property, plant and equipment (paragraph 77(c)) requires that, where items of property, plant and equipment are stated at revalued amounts, entities must disclose “the methods and significant assumptions applied in estimating the items’ fair values”.

51. Several entities provided only a general description of the methods and significant assumptions applied. We consider that this fails to comply with NZ IAS 16 (paragraph 77(c)). Similar to the requirement to disclose specific assumptions when valuing goodwill and intangibles for impairment testing or the valuation of investment properties, specific significant assumptions must also be disclosed in the valuation of property, plant and equipment to allow users to determine whether the resulting valuation is realistic and has been reliably determined.

52. The types of assumptions to disclose will vary depending on the type of property, plant and equipment. However, we draw issuers’ attention to International Valuation Application 1: Valuation for Financial Reporting (IVA1), as adopted by the Property Institute of New Zealand, which specifically requires a valuer to include in its report the information required by IAS 16 (paragraph 77).

or after 1 January 2009, requires companies to publish information consistent with that reported to their management, so the market has the same perspective.

54. The Commission asked the issuer to provide their internal management reports and a reconciliation between these and the segment reporting disclosures contained in the issuer’s financial statements.

55. In addition to the matters raised above, the Commission continues to find a significant number of inadequate disclosures surrounding market matters.

56. Of the 108 matters raised with issuers as part of Cycles 9 to 11, 20 (19%) related to three common areas of inadequate market disclosures.

57. The Securities Markets Act 1988 (Section 35F) requires every public issuer that is a company to send a note containing certain information on substantial security holders (SSH) in the issuer to each of its shareholders with or in the annual report or notice sent under the Companies Act 1993 (Section 209). Issuers are only required to disclose information based on the SSH notices they have received.

58. As part of Cycle 11, the Commission wrote to four issuers in relation to their disclosures in this area and would like to highlight the following two points.

59. Firstly, issuers are required to disclose the total number of voting securities in each class, at the “record date”⁸, even if they only have one class of voting security at balance date and “record date”⁹.

60. Secondly, if an issuer is relying on other information which is disclosed elsewhere in the statutory information, for example the Top 20 Shareholders, to achieve compliance with the SSH legislative requirements it is vital that the reader can clearly link this information together. One way in which this can be achieved is through the “record date” being clearly disclosed in both areas and the two pieces of information being included within the same page of the annual report.

61. None of the matters raised with the four issuers in relation to SSH disclosures were material or otherwise required enforcement action.

62. The Companies Act 1993 (Section 148(1)) requires directors who have a relevant interest in any shares issued by the company to disclose the number and class of shares in which the relevant interest is held, disclose the nature of the relevant interest and to ensure that this information is entered in the interests register. If a director acquires or disposes of a relevant interest in shares issued by the company, they must disclose

⁸Section 35F(3) of the Securities Markets Act 1988 defines the record date as “a date stated in the notice that is not earlier than three months before the notice is sent.”

certain information to the board and ensure that this information is entered in the interests register (Section 148(2)).

63. The Commission wrote to two directors and one issuer as part of its Cycle 11 review in this area. The Commission wishes to highlight the following two points.

64. Firstly, a director is required to continue complying with the disclosure requirements when they acquire or dispose of a relevant interest in shares issued by the company for six months after the person ceases to be a director of the company.¹⁰

65. Secondly, the Companies Act 1993 (Section 211(1)(e)) requires every company to state in their annual report the particulars of entries in the interests register made during the accounting period.

66. None of the matters in relation to directors’ interests and share dealings identified were material or otherwise required enforcement action.

67. In Cycle 11, the Commission wrote to three auditors about the disclosure in their respective audit reports that they had no other relationship with the issuers or any of their subsidies other than in their capacity as auditor. In all three cases, the issuers’ financial statements made the necessary disclosures about the nature of the relationship and the amounts involved. However, the audit reports omitted the disclosures.

68. The Commission drew the auditors’ attention to the New Zealand Institute of Chartered Accountants Auditing Standard AS-702 The Audit Report on an Attest Audit (paragraphs 25(e) and 30) which requires auditors to make a statement identifying the existence and nature of any other relationship between the auditor and the entity in their audit report.

69. In two cases the auditors agreed to ensure better disclosure in future, while the third was resolved through the auditor providing a satisfactory explanation.

70. The Commission considers it important for auditors and issuers to ensure that there is disclosure of all fees paid to the issuer’s auditor. It is important that there is transparency in the types of services (other than audit services) and the related fees that are paid to an issuer’s auditor. The provision of other services, particularly where the amounts involved are large in relation to the total fees paid to an auditor, could compromise an auditor’s independence in carrying out audit work.

71. In general, our findings from Cycle 11 indicate that the level of compliance with NZ IFRS is appropriate for a developed capital market like New Zealand. However, the Commission considers that there is still room for issuers to improve their compliance with NZ IFRS to ensure greater transparency in the New Zealand market.

72. NZ IFRS is increasingly becoming more principle-based. In addition, many NZ IFRS require information to be presented from the perspective of management. Where these involve estimates and judgement, disclosure of the basis underlying such estimates and judgement is necessary to provide a critical context to the accounting numbers. The Commission urges issuers and their directors to take up the challenge of correctly applying the principles underlying NZ IFRS and to assume full responsibility for the transparency of their financial statements.

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL REPORTING SURVEILLANCE PROGRAMME

1. The Securities Commission is the main regulator of the New Zealand securities market. Our purpose is to strengthen investor confidence and foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of our securities markets.

2. The Commission regards quality financial reporting by issuers¹¹to be fundamental to the fairness, efficiency and transparency of New Zealand’s securities markets.

3. Section 10(c) of the Securities Act 1978 requires the Securities Commission “to keep under review practices relating to securities, and to comment thereon to any appropriate body”.

4. As part of carrying out this function the Commission established an ongoing Financial Reporting Surveillance Programme (FRSP) in 2004, with its first Cycle review taking place in 2005. The FRSP is an ongoing surveillance programme.

5. The aim of the Commission’s FRSP is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

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

6. The FRSP involves reviewing selected issuers’ financial statements. At the end of each cycle the Commission publicly reports on this surveillance work to provide market participants with a summary of its findings. Copies of reports for all cycles are available on the Commission’s website www.seccom.govt.nz.

(a) In relation to an equity security or debt security, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to an equity security or a debt security, or to a trust deed that relates to a

debt security, the person on whose behalf any money paid in consideration of the allotment of the security is

(b) In relation to a participatory security, or to an advertisement, investment statement, prospectus, or registered prospectus, or to a deed of participation that relates to a participatory security, the manager:

advertisement that relates to such an interest, the contributory mortgage broker:

(d) In relation to a unit in a unit trust, or to an advertisement, investment statement, prospectus or registered prospectus that relates to such a unit, the manager:

(e) In relation to a life insurance policy, or to an advertisement, investment statement, prospectus, or registered

prospectus that relates to a life insurance policy, the life insurance company that is liable under the policy:

(f) In relation to an interest in a superannuation scheme, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to such an interest, the superannuation trustee of the scheme.

7. The Financial Reporting Act 1993 requires issuers to prepare financial statements that comply with New Zealand Generally Accepted Accounting Practice (NZ GAAP) and provide a true and fair view of the matters to which they relate¹².

8. The Commission reviews issuers’ financial statements against NZ GAAP. For the purpose of the Financial Reporting Act, financial statements and group financial statements comply with NZ GAAP only if those statements comply with:

(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:

9. The Financial Reporting Act defines “applicable financial reporting standard” to mean an approved financial reporting standard that applies to a reporting entity (or group) and to an accounting period (or interim 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 the Financial Reporting Act. All issuers are required to apply NZ IFRS in the preparation of their financial statements for annual accounting periods commencing on or after 1 January 2007.

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

(b) whether any breach of NZ GAAP identified in those financial statements is likely to cause the financial statements to not show a true and fair view or is likely to be materially misleading to users in the context of information disclosed for investment decision-making under the Securities Act and therefore require enforcement action; and

11. The FRSP aims to review all issuers listed on NZX Limited (NZX) at least once over a three to four year period.

12. In reviewing all listed issuers, dual and overseas listed issuers may also be selected.

_{Overseas listed issuers are issuers domiciled or incorporated outside
New Zealand}

¹²Part II of the Financial Reporting Act 1993 (section 11) requires every ‘reporting entity’ to prepare financial statements that comply with generally accepted accounting practice and to provide any additional information required to ensure those statements are a true and fair view of the matters to which they relate.

Part I, Section 2 of the Financial Reporting Act 1993 defines a reporting entity as : (a) An issuer; or

that have a recognised stock exchange as the home exchange and are also listed on

13. Dual listed issuers are issuers incorporated in Australia which are on the Australian

14. Where dual and overseas listed issuers are selected, the Commission first writes to the regulator in the overseas jurisdiction to determine whether a review of the financial reporting of the issuer has already been undertaken locally. If it has, these issuers are not reviewed by the Commission. Where the issuer has not been reviewed by the overseas regulator, the Commission undertakes a review of the annual report, NZX announcements and, if applicable, the current prospectus. Where appropriate, findings are communicated to the overseas regulator. If the Commission communicates what it considers to be a significant matter about an issuer to an appropriate overseas regulator and the overseas regulator proposes to take no action, the Commission will write directly to the overseas or dual listed issuer on the matter.

15. Issuers trading on the Unlisted¹³exchange and issuers not listed on any exchange may be also included in the cycle reviews.

16. Issuers may be selected on the basis of criteria determined by the Commission: on areas of particular risk affecting the issuer; the sector the issuer is in at the time of selection; and/or their balance dates. Issuers can also be reselected for a later review where the nature of issues identified in an earlier cycle raised concerns.

17. The Commission reviews an issuer’s annual report when reviewing its financial statements and, in the case of listed issuers, this includes a review of any NZX announcements for the period and any relevant prospectuses. While the NZX announcements are not comprehensively reviewed, any market matters relating to continuous disclosure, disclosure of relevant interests by directors and officers, and substantial security holder disclosure, are followed up where necessary.

18. Matters identified in the review are referred to as matters raised¹⁴or other matters.

19. Matters raised are those that are important or where further clarification or information is needed. The Commission is likely, for example, to write to an issuer where a matter:

¹³Unlisted is an unregistered securities trading facility; it is not a registered stock exchange or authorised securities exchange under the Securities Markets Act 1988. Unlisted provides a facility for trading previously allotted securities.

¹⁴Prior to Cycle 6, the Commission referred to matters raised as significant matters.

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

21. The Commission writes to an issuer requesting additional information and in some cases asks the issuer to revise or enhance disclosures in future financial statements.

22. When writing to an issuer in respect of matters raised, the Commission also includes other matters found in the review in relation to that issuer. Other matters are miscellaneous matters that the Commission considers could be better disclosed.

23. The Commission’s policy is not to write to an issuer whose financial statements raised only other matters, unless those matters are so numerous that it is useful to provide the issuer with feedback. In this respect the Commission is mindful of its educative role in the FRSP.

24. In each case where the Commission writes to an issuer, a copy of the letter is also sent to the issuer’s auditor. This practice acknowledges the role of auditors in helping maintain and improve the standard of financial reporting. It also alerts an auditor to the particular aspects of its client’s financial statements that may be of concern to the Commission.

25. 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 the integrity of financial reporting and to the efficiency and integrity of the securities markets.

26. Where a matter may have significant market impact it is removed from the FRSP and considered separately as an enforcement matter.

27. Referrals are also made to appropriate bodies where matters identified in the FRSP