![]() |
Home
| Databases
| WorldLII
| Search
| Feedback
New Zealand Securities Commission |
Last Updated: 10 November 2014
Report on Statement by ABN AMRO Capital (Belgium) N.V. in Freightways Limited's Prospectus
REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE
1
4 August 2005
TABLE OF CONTENTS
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 1 of the programme the Commission reviewed the financial reports of 40 issuers. This report on the Cycle 1 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.
The purpose of the Cycle 1 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.
Few serious problems were identified. However, a number of issuers need to raise the standard of their financial reporting. Reports of two issuers of the 40 reviewed had serious problems and were already subject to scrutiny by other agencies. Reports of 16 issuers had some shortcomings that need to be addressed. One of these reports was referred to the Commission's enforcement staff. We wrote to the other issuers.
Some of the matters found were:
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 inconsistencies in substantial security holder disclosures and some potential gaps or delays in continuous disclosure notices. Instances of lack of compliance with the continuous disclosure requirements of the NZX Listing Rules were also found. These matters have been referred to the NZX.
The Commission will continue its Financial Reporting Surveillance Programme and is likely to broaden its scope. Later review cycles will include reviews of disclosures and adjustments made by issuers as they move to New Zealand equivalents of International Financial Reporting Standards.
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 aim of the 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.
people reading financial reports will fully understand them;
c.
investors can have confidence in the credibility of financial information provided by issuers; and
d.
high quality financial reporting will contribute to the integrity of New Zealand's securities markets.
Cycle 1 Review of Financial Reporting by Issuers
4.
In the first cycle of the programme the Commission reviewed the financial
reports of 40 issuers with balance dates from 31 March to
31 July
2004.
5.
The reports were reviewed against New Zealand Generally Accepted Accounting Practice (NZ GAAP). Financial statements comply with NZ GAAP only if they comply with:
a.
applicable Financial Reporting Standards (FRS) approved by the New Zealand Accounting Standards Review Board; and
b.
where there are no such standards, 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.
This includes Statements of Standard Accounting Practice
(SSAP).
6.
The purpose of the 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 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.
7.
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, however any
obvious issue related to continuous
disclosure, substantial security holder
disclosure, or auditors, was followed up.
8.
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
9.
The Commission reviewed the audited full-year financial reports of 40 companies with balance dates from 31 March to 31 July 2004. To gain a complete view of financial reporting practices we also reviewed:
a.
financial information in any current prospectuses;
b.
substantial security holder information;
c.
continuous disclosure notices; and
d.
sections of the annual reports (e.g. the chairman's report).
10.
The review of the wider information was to identify any inconsistencies
between the various documents, which in turn helped assess
the adequacy of GAAP
compliance.
11.
The selection of 40 issuers was made up of:
a.
28 issuers listed on the NZX
b.
8 issuers listed on the NZAX, and
c.
4 issuers whose shares are traded on Unlisted.
12.
We made further enquiries of some issuers. In some instances this was because it was not possible to assess whether FRS had been fully complied with from the information provided in the financial statements and other documents.
Purpose of this Report
13.
This report on Cycle 1 of the Commission's Review of Financial Reporting by Issuers aims to provide market participants with the Commission's findings from this review. It also provides some guidance on the Commission's expectations of disclosure by issuers.
REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 1
Few serious problems were identified in the Cycle 1 review. However, the review indicates that a number of issuers need to raise the standard of their financial reporting.
Follow-up Action
15.
Reports of two of the 40 issuers reviewed had serious problems and were already subject to scrutiny by other agencies. One issuer had received an audit report with multiple audit opinion qualifications. The other issuer had received an audit report with two fundamental uncertainty paragraphs. The Commission will monitor these entities as part of future surveillance reviews.
16.
Reports of 16 issuers were found to have some shortcomings that need to be
addressed. One of these was referred to the Commission's
enforcement staff. We
wrote to the other 15 issuers asking them for clarification of some matters,
and/or asking them to address
specific shortcomings when preparing their next
financial reports.
17.
We wrote to issuers whose reporting raised at least one matter of
significance. In these letters any minor matters were also drawn
to their
attention. We did not write to issuers whose reports raised only minor
matters.
18.
A copy of the letter was sent to the issuer's auditor. Auditors have an important role in encouraging companies to comply not only with the essential 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.
Outcome of Matters Raised
19.
Fifty-two percent of the matters raised in letters to issuers were viewed by
the Commission as significant.
20.
Table 1 on page 8 outlines the outcome of matters raised in these letters.
Table 1: Outcome of matters raised in letters to issuers
|
|
|
|||||
|
|
|
|
|
|
|
|
Notes
|
Outcome
|
"Significant"
|
%
|
Other
|
%
|
Total
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Resolved
|
3
|
|
3
|
|
6
|
|
(2)
|
Point taken/change agreed
|
13
|
|
16
|
|
29
|
|
|
Agreement reached
|
16
|
73%
|
19
|
95%
|
35
|
83%
|
|
|
|
|
|
|
|
|
(3)
|
Second letter sent
|
4
|
|
1
|
|
5
|
|
(4)
|
Other follow-up action
|
2
|
|
0
|
|
2
|
|
|
Further follow-up action taken
|
6
|
27%
|
1
|
5%
|
7
|
17%
|
|
|
|
|
|
|
|
|
|
Total matters raised
|
22
|
|
20
|
|
42
|
|
|
%'s
|
52%
|
|
48%
|
|
100%
|
|
|
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 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. as a result of the
response the matter has been referred to the NZX.
21.
Satisfactory agreement was reached with issuers on 73% of significant matters raised. Four of the remaining significant matters were reiterated in a second letter and will be monitored on an on-going basis One matter has been referred to the NZX, and one matter is still under review.
Significant Findings
Financial Reporting Disclosures
22.
The nature of many of the matters raised with issuers suggests that issuers should consider:
a.
whether they have been sufficiently transparent in their disclosures;
b.
whether they could pay greater attention to detail in complying with some of the ancillary financial reporting disclosures (e.g. disclosures in respect of financial instruments and related party disclosures); and
c.
whether they could better manage some of the year end processes for
finalising the annual report.
23.
In some cases the disclosures provided raised further questions prompting us
to write seeking further explanation. Some of the responses
explained the
situation, indicating that more clarity or transparency by the issuer would have
meant that we would not have had to
ask the questions.
24.
One matter relating to large differences between actual and prospective
information was referred to the Commission's enforcement staff.
The Commission's
interest is whether the original prospectus is misleading, and whether
prospective financial information is correctly
labelled as a forecast or a
projection.
25.
Other significant matters followed up with the issuers were:
a.
the reconition and measurement of an intangible asset;
b.
the basis for valuation of property, plant and equipment;
c.
an audit report which did not provide an opinion over the issuer's group financial statements; and
d.
the appropriateness of a prior period adjustment.
26.
The intangible asset had been recognised on acquisition and we queried
whether all the residual balance on acquisition should have
been allocated to
the intangible asset as opposed to some of it being allocated to goodwill. The
Commission will continue to monitor
this issuer's financial report to see
whether the life and value of the intangible is being reassessed on a regular
basis to determine
if any provision for impairment is necessary.
27.
The issue relating to the valuation of property, plant and equipment
concerned the basis of valuation used to determine fair value
for a major class
of assets. The issuer's disclosures suggested non-compliance with FRS-3
Property, Plant and Equipment.
28.
Section 16 of the Financial Reporting Act 1993 requires an audit report to
give an opinion on the parent and group financial statements.
In this instance
the checking processes surrounding the production of the annual report failed to
identify that the audit opinion
included in the financial report covered the
parent only. These processes would normally include checks of the printer's
proofs and
website postings by management and the auditor.
29.
The explanation for a prior period adjustment was difficult to understand.
Such adjustments are rare and therefore warrant very clear
explanation.
One issuer had entered into a share-based arrangement with a distributor of
its product.
31.
The arrangement involved a distributor being issued share options if certain
targets on product order quantities were met. Although
this arrangement had been
mentioned in a Continuous Disclosure Notice there was no mention of the
arrangement in the issuer's financial
report.
32.
When the issuer prepared its financial report there were no New Zealand FRS
or SSAP that dealt directly with share-based arrangements.
However, other
standards would have provided authoritative support for disclosure
requirements.
33.
We now have NZ IFRS 2 Share-based Payment, issued November 2004, that deals with the subject of share-based payment. Paragraph 44 says that:
"An entity shall disclose information that enables users of the financial
statements to understand the nature and extent of share-based
payment
arrangements that existed during the period."
34.
Information about share options is relevant to investors and should have been disclosed in the issuer's next statutory financial statements.
Actual Versus Prospective Financial Information Comparison
35.
The Commission considers that the actual versus prospective financial
information (PFI) comparison disclosure requirement is important
so that
investors are given feedback on the relative reliability of prospective
financial information, including audited reasons
for variances.
36.
We found a number of instances where the financial statements included a
comparison of actual and PFI. However, no explanations of
major variations
between PFI and actual results were disclosed as required by FRS-9
Information to be Disclosed in Financial Statements paragraph 5.4. There
were also instances of errors in the labelling of columns of figures.
37.
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.
Format of the Statement of Movements in Equity
38.
The format of the Statement of Movements in Equity (SoME) in many financial
reports did not appear to be compliant with NZ GAAP in
that they did not
disclose a total recognised revenues and expenses (TRRE) line.
39.
The SoME is a primary financial statement. FRS-2 Presentation of Financial
Reports paragraph 7.1 indicates that one of the objectives of the SoME is as
a measure of comprehensive income. To this end FRS-2 paragraph
7.3(a) requires
disclosure of a TRRE line in the SoME. Therefore we would expect this line to be
disclosed in a SoME.
40.
Although all of the components making up TRRE are disclosed in the SoME,
meaning that a knowledgeable reader could calculate the figure,
we believe that
it is important that the TRRE figure is also disclosed.
41.
We wrote to issuers where there were multiple figures making up TRRE. However, even for other issuers where TRRE only comprises Net Surplus, best practice would be to disclose a TRRE line in the SoME.
Dating of Information
42.
The Commission encourages issuers to actively manage the final stages of
their year end reporting process for finalising the annual
report. Some reports
indicate that some issuers are not well organised through the final stages of
the reporting process. However,
most companies do appear to successfully manage
this process.
43.
The annual report, comprising the financial report and other statutory
disclosures, should be reviewed before being dated and signed
by the directors.
Auditor sign-off should follow signing of the financial report.
44.
The three issues identified were:
a.
undated financial statements;
b.
differences between dates for signing of the financial statements and/or annual report and the date of the security holder information; and
c.
one unusual difference between the date of the accounts and the audit report
where the latter preceded the former.
45.
Although signed by the directors a number of accounts were not dated. Both
FRS-5 Events After Balance Date and relevant legislation require the
financial statements and annual report be dated and signed by those authorised
to do so.
46.
The differences in dates suggest that the sequence of events may need to be better managed by issuers to ensure that directors and auditors are properly reviewing the annual report in terms of their responsibilities.
Various other matters were identified which, although of lesser significance, warrant greater attention by those who prepare annual reports.
Subsequent Event Disclosure
48.
FRS-5 Events After Balance Date requires disclosure of material events
that occur after balance date.
49.
In a few instances there were significant subsequent events which, in the Commission's view, should have been disclosed. Examples of these are:
a.
non-disclosure of dividends proposed after balance date. Disclosure is required by FRS-5;
b.
a significant increase in ownership of another entity; and
c.
significant events occurring to an associate of the reporting entity.
50.
Disclosure of these events elsewhere in the annual report, such as the chairman's report, is not sufficient.
Total Operating Revenue
51.
FRS-9 Information to be Disclosed in Financial Statements paragraph
6.6 requires total operating revenue to be disclosed separately.
52.
In some instances interest income had been offset against interest expense
and not included in total operating revenue. The net figure
had then been
included as part of expenses. Therefore, the complete total operating revenue
had not been disclosed as required by
FRS-9.
53.
In the Commission's view, disclosure of the various components contributing to total operating revenue does not meet the FRS-9 requirement.
Exceptional Risks of Operating
54.
FRS-9 states:
8.14
Entities shall disclose information from which it is possible to identify and evaluate exceptional risks of operating.
8.15
Exceptional risks can include ... dependence on a small number of
suppliers or customers.
55.
This is an often overlooked accounting requirement that can provide very
important information that is useful to investors. The Commission
encourages
issuers to more actively consider whether to include a note to their financial
report covering this information.
56.
In a number of instances there should have been an exceptional risks of
operating note.
57.
In some cases this type of information may be in the chairman's report or in other notes to the accounts. However, having information elsewhere in the annual report does not fulfil the FRS requirement. Information scattered throughout the notes does not assist readers to readily grasp an understanding of the exceptional risks of operating.
Disclosure of Discount Unwind for Provisions
58.
GAAP requires present value discounting to be used to calculate the amount of
a provision - more so when the settlement of an amount
is going to occur well
into the future. It also requires a present value discount (passage of time)
unwind when a provision has been
present valued. This unwind amount is viewed as
interest expense.
59.
FRS-15 Provisions, Contingent Liabilities and Contingent Assets
paragraph 11.1(e) requires separate disclosure of this interest expense.
60.
In many cases where there were longer term provisions there was no separate interest disclosure. Lack of this disclosure may indicate that these entities are not calculating their longer term provisions on a present value basis, and/or not updating them over time to reflect the present value discount unwind.
Independent Foreign Operations
61.
There were some instances relating to accounting for independent foreign
operations for which the disclosures appeared unusual or
inadequate.
62.
FRS-21 Accounting for the Effects of Changes in Foreign Currency Exchange
Rates outlines the accounting requirements for such operations.
63.
Examples of areas for improvement were:
a.
the relevant accounting policy for an issuer indicated that exchange differences were taken to a foreign currency translation reserve but no foreign currency translation reserve appeared in the accounts; and
b.
no movement in the foreign currency translation reserve for the year despite there still being an independent foreign currency operation. We would have expected some movement.
Employee Share Ownership Plans
64.
Employee share ownership plan (ESOP) disclosures should include all matters
required by FRS-30 Reporting Share Ownership Arrangements Including Employee
Share Ownership Plans.
65.
We identified areas where disclosure of ESOP did not fully comply with the requirements of FRS-30. The areas of non-compliance were:
a.
non-disclosure of the ESOP itself. Some companies did not disclose such information even though it is apparent from the continuous disclosure notices that such a plan existed; and
b.
some companies provided a description of the ESOP but did not provide
disclosures on matters such as the number and percentage of
shares held by ESOP,
classified by class of shares, the number of shares held by ESOP which has been
allocated to employee(s) and
the number of shares which remain unallocated.
66.
Overall, the review found that disclosure of ESOP would be more complete if all the relevant sections of FRS-30 are followed.
Financial Instruments
67.
FRS-31 Disclosure of Information About Financial Instruments requires
disclosures to be made in respect of financial instruments.
68.
The review indicated that improvements could be made in the general quality
of disclosures required by this standard. Some disclosures
appeared to be fairly
generic and sometimes incomplete. In many instances financial instrument
disclosures for the issuers reviewed
appeared to not comply with some of the
detailed requirements of FRS-31.
69.
Examples of findings in respect of financial instrument disclosures were:
a.
the accounting policy disclosure on financial instruments did not cover the basic types of financial instruments;
b.
a lack of interest rate sensitivity information disclosure in respect of, e.g. short-term deposits, term deposits, bank overdraft and convertible notes; and
c.
inconsistencies between figures in the Statement of Financial Position and those in the financial instruments note.
Disclosure About Related Parties
70.
SSAP-22 Related Party Disclosures requires disclosure of the
relationships between the reporting entity and its related parties and of
transactions with those parties.
71.
The adequacy and quality of disclosure by issuers could be improved. The
identification and disclosure of related party transactions
are material matters
for investors.
72.
Disclosures made by these entities in respect of the requirements of SSAP-22 paragraph 5.1 generally require improvement. Some examples were:
a.
a total was given for related parties as a group rather than for each related party;
b.
a lack of detail about the identity of the related parties for which there have been transactions; and
c.
the outstanding balance of transactions at balance date was given but no
financial information was given in respect of all transactions
undertaken during
the year.
73.
In some cases a positive statement e.g. There are no outstanding balances with related parties would clarify a situation which is unclear from the financial report.
Completeness of Disclosure
74.
Mention of a matter in sections of an annual report other than the financial report is not sufficient if an FRS requires it to be disclosed in the financial report.
Market Matters
Substantial Security Holder Information
75.
In the process of the review we identified some inconsistencies in the
substantial security holder disclosures and some potential
gaps or delays in
continuous disclosure notices. The Commission expects compliance with these
requirements.
76.
Section 26(1) of the Securities Markets Act 1988 requires every public issuer
to publish a list of all substantial security holders
recorded in the company's
file kept under section 25 of the Act. The disclosure under section 26 of the
Securities Markets Act must
include the total number of voting securities of the
public issuer as at the date of the record.
77.
Issuers should take care to ensure that they comply with the various substantial security holder information disclosure requirements.
Continuous Disclosure Notices
78.
The Commission and the NZX are co-regulators of the NZX's markets. NZX is the
primary regulator concerned with compliance with the
Listing Rules, and the
Commission, as the statutory regulator, is concerned with the law. These
co-regulatory responsibilities are
set out in a published Memorandum of
Understanding between the NZX and the Commission.
79.
Rule 10 of the Listing Rules defines "material" and requires immediate
release of "material" information to the market.
80.
The Listing Rules are supported by the Securities Markets Act 1988
requirements relating to continuous disclosure by public issuers.
81.
A number of instances were found where there has been either a delay in
notification of what appeared to be material information,
or else a failure to
do so. The cases related to a lack of, or late, notification of acquisitions and
maiden dividends.
82.
These matters have been referred to the NZX.
NXZ Waiver
83.
One instance was found of non-disclosure in an annual report of an NZX
waiver.
84.
The issuer had obtained a waiver from the NZX in respect of NZAX Listing Rule
B4.1. The condition associated with granting of the
waiver was that the issuer
disclose the waiver in its annual report.
85.
The waiver that was not disclosed in the annual report concerned relief from
an NZX requirement regarding a related party transaction.
86.
This matter has been referred to the NZX.
INTERNATIONAL FINANCIAL REPORTING
STANDARDS
87.
There are risks associated with the period prior to and during the
implementation of NZ IFRS because issuers and auditors face a significant
learning curve, and issuers have to manage system and process changes. Issuers
will have to take account of current NZ GAAP as well
as the differences that
will impact their financial report under NZ IFRS GAAP.
88.
Issuers have three years within which they will be able to choose to make the
switch to NZ IFRS. During this period, current NZ GAAP
will co-exist with NZ
IFRS.
89.
Disclosures about the impact of adopting NZ IFRS must be made by issuers prior to adopting NZ IFRS as required by FRS-41 Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards.
ONGOING REVIEW AND ENFORCEMENT
90.
The Commission will continue to review issuers' financial reporting as part
of the Financial Reporting Surveillance Programme but
will broaden its scope.
91.
The next review cycles will include a review of disclosures and adjustments
made by issuers as they move to New Zealand Equivalents
of International
Financial Reporting Standards. These will include impact disclosures made prior
to transition, then adjustments
made to the balance sheets at the point of
transition, and any other significant changes in accounting policies during this
transition.
92.
The Commission will raise any identified breaches of the law with individual issuers, and take enforcement action as appropriate. This could include referral of matters to agencies such as the Ministry of Economic Development, the Accounting Standards Review Board, and the Institute of Chartered Accountants of New Zealand.
* * * * *
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/other/NZSecCom/2005/6.html