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New Zealand Securities Commission |
Last Updated: 14 November 2014
CYCLE 6
Financial Reporting Surveillance
Programme
REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE
6
Financial Reporting Surveillance Programme
29 February 2007
CONTENTS
The
Commission's Financial Reporting Surveillance Programme
New Zealand
Generally Accepted Accounting Practice (NZ GAAP)
Selecting issuers
CYCLE 6: AN OVERVIEW
Scope
Overall Comments
Outcome of Matters Raised
Referral to NZX
Moving to NZ IFRS
Getting the "basics" right
"Industry practices"
CYCLE 6 SPECIFIC FINDINGS
Matters relating to NZ
IFRS financial statements
Matters
relating to previous NZ GAAP financial statements
Market matters
Substantial security holder
information
Director share dealings
NZX referral
ONGOING REVIEW AND ENFORCEMENT
EXECUTIVE SUMMARY
Financial Reporting Surveillance Programme
The Securities Commission of New Zealand has established a Financial Reporting Surveillance Programme to review financial reporting practices of issuers. The aim of this programme is to encourage New Zealand issuers to improve the quality of their financial reporting. The Commission believes the quality of financial reporting is inextricably linked to the fairness, efficiency and transparency of securities markets.
Findings from Cycle 6
In Cycle 6 the Securities Commission reviewed the financial reports of 30 issuers with balance dates from 31 December 2006 to 30 April 2007.
The Commission's review of financial statements prepared in accordance with New Zealand financial reporting requirements covers compliance with Financial Reporting Standards and other sources of NZ GAAP with the purpose of assessing the overall quality of financial reporting.
The reports of 20 of the 30 issuers reviewed had matters that prompted the Commission to write to the issuer. In some cases the Commission asked issuers to revise or enhance disclosures in future financial statements.
The Commission is encouraged by the fact that few matters were identified in the review of financial statements of first-time adopters of NZ IFRS and congratulates those issuers on their preparedness.
Some of the matters found in our review of issuers were:
NZ IFRS
Previous NZ GAAP
The Commission also raised matters relating to disclosures in respect of substantial security holder information, director share dealings and non-compliance with NZX Listing Rules. Issuers should review their compliance with statutory requirements as a critical step in the preparation and finalisation of an annual report.
Substantial security holders should be aware of changes to the Securities Markets Act 1988 relating to disclosure of changes in a substantial security holding. The legislative changes are effective from 29 February 2008.
The Commission also reminds issuers that changes to the Financial Reporting Act 1993, effective from 22 November 2006, now require all issuers to prepare consolidated financial statements.
The Commission is pleased with the cooperation from issuers and their willingness to improve the quality of their financial reporting.
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 aspects of NZ GAAP.
INTRODUCTION
1.
The
Securities Commission is New Zealand's main regulator of investments. 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 financial reporting by issuers1 to be fundamentally important to the fairness,
efficiency and transparency of New Zealand's securities markets.
The Commission's Financial Reporting Surveillance
Programme
3.
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".
4.
As part of its work to carry out this function, the Commission
established the Financial Reporting Surveillance Programme.
5.
The aim of the Commission's Financial Reporting Surveillance
Programme is to encourage New Zealand issuers to improve the quality
of their
financial reporting so that:
6.
The Financial Reporting
Surveillance Programme involves biannual reviews of selected issuers' financial
reports. At the end of each
Cycle review the Commission publishes a report on
this surveillance work that provides market participants with a summary of the
findings. Copies of reports for previous Cycles are available on the
Commission's website www.seccom.govt.nz.
New Zealand Generally Accepted Accounting Practice
(NZ GAAP)
7.
Issuers are required under the
Financial Reporting Act to prepare financial statements that comply with NZ GAAP
and provide a true
and fair view of the matters to which they relate2.
8.
The financial reports of
issuers are reviewed 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:
(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.
9.
The term "applicable financial reporting
standard" is defined in the Financial Reporting Act 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.
10.
In December 2002
the ASRB determined that entities required to comply with NZ GAAP under the
Financial Reporting Act would be required
to apply New Zealand Equivalents to
International Financial Reporting Standards (NZ IFRS) in the preparation of
their financial statements
for periods commencing on or after 1 January 2007,
with the option to apply from reporting periods commencing on or after 1 January
2005.
11.
The purpose of the Commission's Cycle reviews is 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;
(b)
whether any breaches of NZ GAAP identified in those
financial statements are likely to cause the financial statements to not show
a
true and fair view or are likely to be materially misleading to users in the
context of information disclosure (for investment
decision-making) as envisaged
under the Securities Act and therefore require enforcement action; and
(c)
the overall quality of financial reporting practices by
issuers.
12.
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.
Selecting
issuers
13.
The Financial Reporting Surveillance
Programme aims to review all listed issuers over a three to four year period. On
completion of
the next Cycle, Cycle 7, the Commission would have achieved this
aim. Issuers listed on Unlisted3 and non-listed issuers are also included in the
Cycle reviews.
14.
Issuers are also selected on particular
criteria, including the risk profile of the entity and/or sector, and the
balance date of
the issuer to ensure timely feedback. Issuers can be reselected
for a subsequent review where the nature of issues identified in
an earlier
Cycle raised concerns.
15.
In reviewing all listed issuers, dual
and overseas listed issuers are also selected. Four overseas listed issuers were
selected this
Cycle.
16.
Dual listed issuers are issuers
incorporated in Australia which are admitted on the Australian Stock Exchange's
(ASX) Official List
and are also listed on the New Zealand Exchange (NZX) (as
defined in NZX Listing Rules 1.1.2).
17.
Overseas listed issuers
are issuers domiciled or incorporated outside New Zealand which have a
recognised stock exchange as the home
exchange and are also listed on NZX (as
defined in NZX Listing Rules 5.1.1 (b)).
18.
With dual and
overseas listed issuers, 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 so, these issuers are not
reviewed by the
Commission. Where the issuer has not been reviewed by the
overseas regulator the Commission undertakes a reasonableness review of
the
annual report, NZX announcements and current prospectus if applicable. Findings
are communicated to the applicable overseas regulator.
Identifying issues and taking action
19.
A
desk-top review of each financial report is performed in the wider context of
the annual report and, in the case of listed issuers,
any stock exchange
announcements for the period. While these were not comprehensively reviewed, any
obvious issue related to continuous
disclosure, disclosure of relevant interests
by directors and officers, and substantial security holder disclosure, is
followed up.
20.
Matters identified in the review are referred to
as matters raised or other matters. Previously the Commission has
referred to matters raised as significant matters.
21.
The
Commission's approach is to write to an issuer on a matter identified in a
review where the nature of the matter prompts us to
write to the issuer; because
the matter is considered to be of regulatory importance or further clarification
or information is needed.
For example, the Commission is likely to write to
issuers 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)
is
insufficiently explained.
22.
The Commission writes to
issuers requesting additional information and in some cases asks issuers to
revise or enhance disclosures
in future financial statements.
23.
When writing to an issuer in respect of matters
raised, the Commission also includes other matters found in the
review.
24.
The Commission's policy is not to write to issuers
whose reports raised only other matters, unless the numbers of those
matters are so numerous that it is useful to provide feedback to the issuer.
25.
Financial reporting requires the exercise of professional
judgement. The Commission takes this into account when reviewing the financial
reports and determining which matters to follow up.
26.
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 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 and to
the efficiency and integrity of the securities markets.
27.
Where
issues of a much more serious nature are identified that may have a significant
market impact, the matter is removed from the
Financial Reporting Surveillance
Programme and considered separately as an enforcement matter. No such matters
were identified in
this Cycle.
28.
Referrals are made to relevant
bodies where matters identified under the surveillance programme are likely to
be considered a breach
of the:
(a)
Financial Reporting Act; and/or
(b)
Rules or the Code of Ethics of the New Zealand Institute of
Chartered Accountants (NZICA); and/or
(c)
NZX Listing Rules.
Scope
29.
In Cycle 6, the Commission
reviewed the financial reports of 30 issuers (including 4 overseas listed
issuers) with balance dates from
31 December 2006 to 30 April 2007.
30.
The selection of 30 issuers was made up of:
(a)
15
issuers listed on the New Zealand Stock Market (NZSX) or the New Zealand Debt
Market (NZDX) (including 4 overseas listed issuers);
(b)
7
issuers listed on the New Zealand Alternative Market (NZAX);
(c)
3 issuers whose shares are traded on Unlisted; and
(d)
5 issuers who are not listed on any exchange.
31.
In
this Cycle, 7 NZ IFRS financial statements (including those of 5 first-time
adopters), 1 UK GAAP and 3 IFRS as adopted by the European
Union financial
statements were reviewed. The 19 issuers who prepared their financial statement
in accordance with previous NZ GAAP
will produce their first set of NZ IFRS
financial statements in their next financial year.
32.
All the
findings of this Cycle, including those for financial statements prepared in
accordance with previous NZ GAAP, are discussed
in the context of NZ IFRS to
provide feedback to issuers yet to transition to NZ IFRS.
Overall comments
33.
Twenty of the 30
reports reviewed had matters that prompted the Commission to write to the
respective issuers. This included all five
of the first-time adopters of NZ IFRS
reviewed in Cycle 6.
34.
Numerically there was a higher incidence
of matters raised in this Cycle compared with previous Cycles. However,
on reviewing the findings, the Commission does not believe that this higher
incidence is symptomatic of poorer accounting given the nature of the findings.
Generally, issuers' compliance with NZ GAAP is good
and the Commission continues
to be encouraged by the commitment of issuers and their auditors to comply with
NZ GAAP and to provide
a true and fair view of the state of affairs of those
issuers.
35.
The Commission reiterates that issuers can ensure
errors are minimised by:
(a)
consulting with their audit committee during
the preparation and finalisation of the financial statements; and
(b)
incorporating a thorough quality review process when
finalising the financial statements.
36.
Issuers should
review their compliance with statutory requirements as a critical step in the
preparation and finalisation of an annual
report.
Outcome of matters
raised
37.
Table 1 shows the outcome of matters raised in
letters to issuers in Cycle 6.
Table 1: Outcome of matters raised in letters to issuers
Notes
|
Outcome
|
Matters raised
|
%
|
|
|
|
|
(1)
|
Resolved
|
11
|
|
(2)
|
Point taken/change agreed
|
23
|
|
|
Agreement reached
|
34
|
92%
|
|
|
|
|
(3)
|
Second letter sent
|
2
|
|
(4)
|
Other follow-up action
|
1
|
|
|
|
3
|
8%
|
|
|
|
|
|
Total matters raised
|
37
|
|
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.
38.
Although some
responses from issuers explained and resolved a matter the Commission notes that
the original question may well not
have been raised had the issuer's disclosure
been clearer or more transparent. The Commission encourages issuers to ensure
that all
of their disclosures are sufficiently clear to explain adequately
matters included in their financial reports.
39.
The other follow
up action in the table above is the incorrect accounting for a reverse
acquisition under previous NZ GAAP. The Commission
has decided to refer this
matter raised to NZICA (for further details refer to paragraphs 77 to
80).
Referral to NZX
40.
The Commission has
referred one issuer to the NZX for failing to include material information in an
annual report (for further details
refer to paragraphs 146 to 148).
Moving to NZ IFRS
41.
In New Zealand, all
issuers (other than dual and overseas listed issuers) are required to apply NZ
IFRS in the preparation of their
financial statements for periods commencing on
or after 1 January 2007.
42.
The Commission is encouraged by the
fact that most issuers who have adopted NZ IFRS for the first time in this Cycle
have adequately
disclosed the effect of the transition from previous NZ GAAP to
NZ IFRS.
43.
In Cycle 6 we queried two issuers with regard to
their disclosure about the effect of transition to NZ IFRS:
(a)
The first
is a case where the issuer incorrectly accounted for a reverse acquisition in an
earlier year when reporting under previous
NZ GAAP. The correction of that prior
period error in the subsequent year was incorrectly included as an NZ IFRS
transition adjustment.
This issue is discussed further in paragraphs 77 to 80.
The Commission has decided to refer members involved in the preparation and
audit of this issuer to NZICA.
(b)
The other case is where the
issuer did not adequately explain how the transition from previous NZ GAAP to NZ
IFRS resulted in a change
to the timing of revenue recognition. The Commission
considers that in this case, the disclosures could have provided greater detail.
44.
Issuers should be aware that NZ IFRS 1 (paragraph 40)
requires the disclosure of "sufficient detail" to enable users to understand
the
material adjustments to the income statement.
45.
Issuers moving
to NZ IFRS in their next financial statements will find that NZ IFRS generally
requires more disclosures than previous
NZ GAAP. The process of preparing and
finalising financial statements must be thorough to ensure all NZ IFRS
requirements are met.
Getting the "basics" right
46.
In the
preparation of financial statements, both in accordance with previous NZ GAAP
and NZ IFRS, it is important that issuers get
the "basics" right. This means,
for financial statements prepared in accordance with NZ IFRS, providing all the
disclosures required
by NZ IFRS 1, NZ IAS 1 Presentation of Financial
Statements and NZ IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors.
47.
For financial statements prepared
in accordance with previous NZ GAAP, this means providing all the disclosures
required by FRS-1:
Disclosure of Accounting Policies, FRS-2:
Presentation of Financial Reports and FRS-9: Information to be
Disclosed in Financial Statements.
48.
Many of the
disclosures required by the above Standards could be viewed as forming the
"basic" building blocks of an issuer's financial
report. It is important for
this information to be disclosed.
49.
In the review of financial
statements prepared in accordance with NZ IFRS, two issuers failed to disclose
both:
(a)
the key assumptions concerning the future and other key
sources of estimation uncertainty at the balance sheet date (NZ IAS 1
(paragraphs
116)); and
(b)
the level of rounding used in
presenting amounts in the financial statements as required by (NZ IAS 1
(paragraphs 46(e))).
50.
Preparers should note that the
disclosure of key sources of estimation uncertainty was not a requirement under
previous NZ GAAP and
is a new requirement under NZ IFRS.
51.
In
the review of financial statements prepared in accordance with previous NZ GAAP,
two issuers restated certain comparatives explaining
that the reclassification
was to reflect current year classifications but without explaining the nature of
the reclassification as
required by FRS-2 (paragraph 5.15).
52.
The Commission also wrote to an issuer whose financial
statements did not disclose the statutory basis for preparing the financial
statements as required by FRS-1 (paragraph 5.5(a)) and separately to another
issuer for failing to disclose donations made to a trust
as required by FRS-9.
53.
FRS-9 (paragraph 6.13) lists items of expense required to be
disclosed separately including donations made. Paragraph 6.14 of FRS-9
states
that "in most circumstances the items listed in paragraph 6.13 would, by their
nature, be material" and thus require separate
disclosure.
54.
The Commission's review of financial statements prepared in
accordance with both NZ IFRS and previous NZ GAAP continued to find
typographical
errors and inconsistencies in the financial statements, four
instances in this Cycle, that reflect negatively on the quality of issuers'
financial statements:
(a)
historical errors in calculation of goodwill
amortisation;
(b)
liquidity of assets incorrectly presented in
the Statement of Financial Position;
(c)
comments in the
Directors' Statement not reflecting information presented in the financial
statements; and
(d)
inconsistencies in the narrative disclosures
about the allocation of goodwill.
"Industry practices"
55.
The Commission
is concerned that responses from issuers referred to "industry practices" to
justify not complying with applicable
financial reporting standards.
56.
Issuers need to be aware that NZ IFRSs and FRSs are the
primary indicators of NZ GAAP. Where there is an applicable financial reporting
standard on a subject matter and the issuer chooses to adopt "industry
practices" that do not comply with the relevant applicable
accounting standards,
its financial statements will be in breach of NZ GAAP.
Reverse acquisitions
57.
The Commission
has, in this and the last two Cycle reviews, identified three instances of
incorrect accounting for a reverse acquisition
under previous NZ GAAP. The Cycle
6 issuer stated that the "practice adopted by the company was in line with that
adopted by other
entities".
58.
The Commission has agreed that
members involved in the preparation and audit of the financial statements of
this issuer will be referred
to NZICA.
Disclosures about liquidity
management
59.
On a matter regarding the disclosure of an entity's
management of liquidity, one issuer contested a disclosure matter raised by the
Commission stating that "market practice" was to only disclose additional
assumptions and basis of those assumptions where the estimated
or expected
maturity dates approach has been adopted in presenting the liquidity analysis of
the entity.
60.
FRS-33: Disclosure of Information by Financial
Institutions (paragraph 11.4) states that "whichever method is used to
quantify the financial institution's liquidity position, disclosure should
be
supplemented by a discussion of the effects of the assumptions used and the
basis for those assumptions".
61.
There are similar requirements
under NZ IFRS. NZ IFRS 7 Financial Instruments: Disclosures (paragraph
39(b)) requires a description of how an entity manages the liquidity risk
inherent in the maturity analysis of financial
liabilities. In addition, NZ IFRS
7 Guidance on Implementing (IG31) lists some factors that an entity might
consider in providing this disclosure.
62.
NZ IFRS 7 (IG 30)
states, "if an entity manages liquidity risk on the basis of expected maturity
dates, it might disclose a maturity
analysis of the expected maturity dates of
both financial liabilities and financial assets". To clarify that the expected
dates are
based on estimates, the entity should "explain how the estimates are
determined and the principal reasons for differences from the
contractual
maturity analysis that is required by paragraph 39(a) of NZ IFRS 7".
CYCLE 6 SPECIFIC FINDINGS
63.
This
section presents the matters raised with issuers in Cycle 6. The findings
are presented as follows:
(a)
matters relating to NZ IFRS financial
statements;
(b)
matters relating to previous NZ GAAP financial
statements; and
(c)
market matters.
Matters relating to NZ IFRS financial statements
Matters raised
64.
The matters
raised with issuers include:
(a)
inadequate disclosures relating to
goodwill, including disclosures on cash-generating units, recoverable amount and
impairment;
(b)
incorrectly presenting a prior period error as a
NZ IFRS transition adjustment; and
(c)
incorrect disclosure of
earnings per share.
Inadequate disclosures relating to goodwill,
including disclosures on cash-generating units, recoverable amount and
impairment
65.
The following NZ IAS 36 Impairment of Assets
disclosures were not provided by one issuer:
(a)
the carrying amount of
goodwill allocation to the unit (paragraph 134 (a));
(b)
the
basis on which the recoverable amount has been determined (paragraph 134 (c));
(c)
as the recoverable amount was based on value in use
(paragraph 134 (d)(i-v)):
(i)
a description of each key assumption on
which management has based its cash flow projections;
(ii)
a
description of management's approach to determining the value(s) assigned to
each key assumption;
(iii)
the period over which management has
projected cash flows;
(iv)
the growth rate used to extrapolate
cash flow projections compared with the long-term average growth rate for the
products, industries,
or country or countries in which the entity operates;
(v)
the discount rate(s) applied to the cash flow projections.
66.
The Commission draws the
attention of issuers to the accounting requirements of NZ IAS 36 and, in
particular, to the extensive disclosures
relating to estimates used to measure
recoverable amounts of each significant cash-generating unit containing goodwill
or intangible
assets with indefinite useful lives (paragraphs 134 to 136)4. Issuers should note that the disclosures are
required notwithstanding that there may be no impairment in the carrying amount
of
goodwill and intangible assets with indefinite useful lives.
67.
The disclosures in paragraphs 134 to 136 of NZ IAS 36 are new
disclosures which are not required under previous NZ GAAP.
68.
NZ
IAS 36 prescribes procedures that an entity applies to ensure that its assets
are carried at no more than their recoverable amount.
NZ IAS 36 also prescribes
requirements relating to the impairment of goodwill and intangible assets with
indefinite useful lives.
NZ IAS 36 requires the carrying amount of goodwill and
intangible assets with indefinite useful lives to be tested for impairment
annually (paragraphs 10 and 90).
69.
NZ IAS 36 requires that, in
assessing the recoverable amount of goodwill and intangible assets with
indefinite useful lives for impairment
purposes these assets be allocated to
cash-generating units, "the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from
other
assets or group of assets" (NZ IAS 36, paragraph 6).
70.
One issuer that recognised impairment failed to disclose the
discount rate that had been used to estimate the recoverable amount of
a
cash-generating unit. The financial statements explained that in relation to the
current estimate of the recoverable amount (value
in use) of a cash-generating
unit that the discount rates used were based on a "weighted average cost of
capital" applicable to the
issuer. While the method of calculating the discount
rate was disclosed by the issuer, specifically the discount rate that had been
used was not.
71.
NZ IAS 36 (paragraph 130(g)) requires that for
each material impairment loss recognised or reversed, if recoverable amount is
value
in use, the discount rate(s) used in the current estimate and the previous
period (if any) should be disclosed.
72.
In the financial
statements of another issuer where the carrying value of a 50% owned subsidiary
was reduced by writing down the goodwill
on acquisition, details relating to the
impairment were not disclosed in the financial statements (even though those
details were
explained in the Chief Executive's Report). NZ IAS 36 requires an
entity to disclose details about impairment in the financial statements.
73.
While the issuer provided certain impairment disclosures
albeit not in the financial statements the following NZ IAS 36 disclosures
were
omitted:
(a)
the basis on which the unit's recoverable amount had been
determined (ie value in use or fair value less costs to sell) (paragraph
134(c)); and
(b)
the methodology used to determine fair value
less costs to sell (paragraph 134(e)).
74.
The financial
statements of the same issuer also did not identify the subsidiary as the
cash-generating unit for which recoverable
amount had been determined. NZ IAS 36
(paragraph 130(d)) requires financial statements to describe the cash-generating
unit for which
recoverable amount has been determined, e.g. whether it is a
production line, a plant, a business operation, a geographical area
or a
reportable segment.
Incorrectly presenting a prior period error as an NZ IFRS transition
adjustment
75.
In the last three Cycles, the Commission's reviews have
identified instances of incorrect accounting for reverse acquisitions under
previous NZ GAAP by reviewing the issuers NZ IFRS transition adjustments. In
this Cycle, a similar issue was identified. The issuer
had incorrectly accounted
for a reverse acquisition in a prior period under previous NZ GAAP but instead
of presenting the change
in accounting in the current period as a correction of
prior period error the issuer has presented the change as a transition
adjustment
arising from the first-time adoption of NZ IFRS.
76.
Reverse acquisitions are dealt with in FRS-36: Accounting
for Acquisitions Resulting in Combinations of Entities or Operations
(paragraphs 4.50 to 4.53). Reverse acquisition accounting under FRS-36 and NZ
IFRS 3 Business Combinations are similar.
77.
Applying
FRS-36 should achieve the same reverse acquisition accounting results as under
NZ IFRS 3. It should not result in an NZ IFRS
transition adjustment in the
consolidated financial statements.
78.
The issuer also
incorrectly made adjustments to the parent entity's financial statements when
reverse acquisition accounting applies
only to group accounts.
79.
NZ IFRS 3, Appendix 2 (paragraph B8) notes that:
"Reverse acquisition accounting applies only in the consolidated financial
statements. Therefore, in the legal parent's separate financial
statements, if
any, the investment in the legal subsidiary is accounted for in accordance with
the requirements of NZ IAS 27 Consolidated and Separate Financial
Statements on accounting for an investor's separate financial
statements."
80.
The Commission has decided to refer members
involved in the preparation and audit of this issuer to NZICA.
Incorrect disclosure of earnings per share
81.
One issuer
disclosed earnings per share in a note to the financial statements instead of on
the face of the Income Statement.
82.
NZ IAS 33 Earnings Per
Share (paragraph 66) states that "an entity shall present on the face of the
income statement basic and diluted earnings per share".
83.
We
also queried another issuer about its earnings per share disclosures. The
issuer's accounting policies included a note on basic
and diluted earnings per
share when the income statement only showed the basic earnings per share figure.
It was not clear from the
issuer's financial statements if the basic and diluted
earnings per share are equal. In such instances we encourage issuers to clearly
disclose the fact that the basic and diluted earnings per share figure is the
same. NZ IAS 33 (paragraph 67) states that if basic
and diluted earnings per
share are equal, dual presentation can be accomplished in one line on the income
statement.
Other matters
84.
Other matters
contained in letters to issuers adopting NZ IFRS included:
(a)
non-disclosure of the application of Standards that have been issued
but are not yet effective (NZ IAS 8 (paragraph 30));
(b)
NZ IFRS
financial statements still using SSAP-12: Accounting for Income Tax
terminology and presentation for reporting of income tax; and
(c)
non-disclosure of certain requirements of NZ IFRS 2 Share-based
payments.
Matters relating to previous NZ GAAP financial statements
Matters raised
85.
The review of financial statements prepared
in accordance with previous NZ GAAP raised the following matters:
(a)
non-consolidation of a wholly owned subsidiary;
(b)
non-disclosure of fees paid to the auditor for other services;
(c)
omission of signing and dating of the financial statements;
(d)
inaccuracies and non-disclosures related to the statement of
cash flows;
(e)
inadequate disclosure of related party
transactions; and
(f)
incorrect revenue for a subsidiary was
reported in the registered prospectus.
Non-consolidation of a wholly owned subsidiary
86.
One issuer failed
to consolidate a wholly owned subsidiary and to provide group financial
statements as required by the Financial
Reporting Act 1993 and FRS 37:
Consolidating Investments in Subsidiaries (FRS-37).
87.
The issuer was unaware that section 13 of the Financial
Reporting Act was amended by section 10 of the Financial Reporting Amendment
Act
2006. This amendment, which now requires all issuers to prepare group financial
statements, came into force on 22 November 2006.
88.
Section
13(2) of the Financial Reporting Act used to exempt all entities that are wholly
owned by a reporting entity that is a body
corporate that is incorporated in New
Zealand or a nominee of such a body corporate from preparing group financial
statements. Amendments
made to the Financial Reporting Act by section 10 of the
Financial Reporting Amendment Act 2006 means that this exemption no longer
applies to entities that are issuers from 22 November 2006.
89.
Amended section 13(2) states:
"Group financial statements are not required in relation to a reporting
entity that is a company if, on the balance date of the company,
the company is
not an issuer and the only shareholders of the company comprise a reporting
entity that is-
(i)
A body corporate that is incorporated in New Zealand
or a nominee of such a body corporate; or
(ii)
A body corporate
that is incorporated in New Zealand or a nominee of such a body corporate and a
subsidiary of such a body corporate
or a nominee of such a subsidiary."
90.
FRS-37 (paragraph 5.1) states that "a parent that has
one or more subsidiaries at its reporting date must present consolidated
financial
statements in accordance with this Standard".
Non-disclosure of fees paid to the auditor for other
services
91.
Disclosures in the annual reports of three issuers (including
one NZ IFRS issuer)indicated that other services were provided by the
auditors
of the issuers. However, separate disclosures of the fees paid to the auditors
for those other services were not provided.
92.
The requirement
to separately disclose fees paid to the auditor for other services provided is
prescribed both in the Companies Act
1993 and FRS-9 and NZ IAS 1.
93.
The Companies Act (section 211(1)(j)) requires the annual
report of a company to state the amounts payable to the auditor of the company
as audit fees and, as a separate item, fees payable by the company for other
services provided.
94.
FRS-9 (paragraph 6.13(e)(iii)) requires
separate disclosure of other services provided to group entities by the auditor.
Paragraph
6.14 of the same Standard states that "in most circumstances the items
listed in paragraph 6.13 would, by their nature, be material".
Fees paid to
auditors for other services provided are just such an item and must be disclosed
separately.
95.
Under NZ IFRS more detailed disclosures are
required. NZ IAS 1 (paragraph NZ 94.1(a)(ii-iv))) requires separate disclosure
of fees
to each auditor of the parent for audit fees, audit related fees, tax
fees and all other fees, as well as a description of the nature
of the services
provided.
Omission of signing and dating of the financial statements
96.
The
financial statements of one issuer, contained in its annual report, were not
signed and dated as required by the Companies Act,
the Financial Reporting Act
and FRS-5: Events after balance date.
97.
While the
financial statements submitted by the issuer to the Companies Office were signed
by four directors of the company and dated,
the financial statements included in
the issuer's published annual report were not signed and dated by the directors.
98.
Section 211 (1)(b) of the Companies Act requires the
financial statements included in the annual report to be signed in accordance
with section 10 of the Financial Reporting Act. Section 10 of the Financial
Reporting Act requires that directors sign and date the
financial statements.
99.
FRS-5 (paragraph 6.1) states that "an entity must disclose
the date when the financial report was authorised for issue and who gave
that
authorisation".
100.
FRS-5 (paragraph 6.2) explains that it is
important for the users to know when the financial statements were authorised
for issue,
as the financial report does not reflect events after this date.
Inaccuracies and non-disclosures in the statement of cash
flows
101.
The Commission considers that the statement of cash flows is
one of the core financial statements in the financial report of every
issuer. It
helps users of the financial statements assess the entity's ability to generate
cash flows to meet its obligations when
they fall due and its other cash
operating, investing and financing needs. The statement of cash flows helps
users assess factors
such as the entity's liquidity, financial flexibility,
profitability and risk.
102.
In Cycle 6 matters were raised with
three issuers in relation to their statement of cash flows.
Non-cash transactions
103.
One issuer included a bonus share
issue in the Statement of Cash Flows as financing activities. As this is a
non-cash transaction
it should not have been included in the Statement of Cash
Flows.
104.
FRS-10: Statement of Cash Flows (paragraph
5.26) requires the statement of cash flow to "reflect only transactions wholly
in cash and the cash element only of transactions
that are partly in cash". This
is explained further in FRS-10, paragraph 5.29: "Many investing and financing
activities do not result
in cash flows although they may affect the capital and
asset structure of the entity...where such transactions do not involve cash
flows, they are to be excluded from the statement of cash flows."
105.
FRS-10 (paragraph 5.27) requires non-cash investing and
financing transactions which affect assets and liabilities that have been
recognised, to be disclosed in a note to the financial report. The note should
be referenced to the appropriate items in the financial
statements.
Netting of cash flows
106.
One issuer's disclosures
about its policies on netting of cash flows were inadequate. The issuer
disclosed in the Statement of Accounting
Policies that certain cash flows had
been provided net and explained the nature of the netting. However, the
Statement of Cash Flows,
specifically the operating cash flows, included
additional netting that was not covered by the accounting policies.
107.
FRS-10 (paragraph 5.33) states that "when a cash flow in the
statement of cash flows combines receipts and payments to present a net
cash
flow, a note to the financial statement is required identifying such a cash
flow". The entity is also required to give reasons
why those receipts and
payments have been netted off.
108.
FRS-10 (paragraph 5.35)
reiterates that "where the statement of cash flows includes one or more net cash
flows, disclosure by note
is to identify those cash flows as net cash flows and
is to provide the reasons for presenting those cash flows as net cash flows".
Operating versus financing cash flows
109.
The Commission wrote
to one issuer enquiring about its disclosure of certain cash flows as operating
cash flows rather than financing
cash flows.
110.
A definition of
operating activities and financing activities is provided in paragraphs 4.10 and
4.15 of FRS-10. Issuers must assess
cash flows with reference to these
definitions when classifying cash flows into the three groups as required by
paragraph 5.3 of
FRS-10. "The classification...provides information about the
entity's cash performance and provides possible comparisons with other
time
periods, with other entities and with other industries" (FRS-10 (paragraph
5.5)).
Inadequate disclosure of related party transactions
111.
Two issuers
failed to provide the following related party disclosures as required by SSAP
22: Related Party Disclosures:
(a)
the nature of the relationship
with named companies that provided accounting and administrative services free
of charge (as required
by paragraph 5.1(a));
(b)
the nature of
the relationship with a trust was unclear as a disclosure was not made in the
related party note (as required by paragraph
5.1(a));
(c)
the
outstanding balances at year end in relation to a lease agreement with a company
related to one of the directors (as required
by paragraph 5.1(d)); and
(d)
the value of the transaction, any outstanding balances, any
debts written off or forgiven during the year in relation to a contract
with a
related party to provide certain services (as required by paragraph 5.1(c),(d)
and (e)).
112.
One of the above issuers also failed to
include director related interests in the related party note but did disclose
them elsewhere
in the annual report.
113.
As New Zealand entities
are moving to adopt NZ IFRS, the Commission draws issuers' attention to the
following discussion under NZ
IFRS, in the Standard NZ IAS 24 Related Party
Disclosures (paragraphs 5-8) which explains the importance of related party
disclosures:
"Related party relationships are a normal feature of commerce and
business...A related party relationship could have an effect on
the profit or
loss and financial position of an entity...even if related party transactions do
not occur. The mere existence of the
relationship may be sufficient to affect
the transactions of the entity with other parties...For these reasons, knowledge
of related
party transactions, outstanding balances and relationships may affect
assessments of an entity's operations by users of financial
statements,
including assessments of the risks and opportunities facing the
entity."
Incorrect revenue for a subsidiary was reported in the registered
prospectus
114.
One issuer did not apply a consistent basis for
presenting revenue for a subsidiary in its financial statements and prospectus
where
the subsidiary's revenue was reported gross in the issuer's financial
statements and the same subsidiary's revenue was reported net
in the issuer's
prospectus.
115.
On enquiry, the issuer clarified that the
subsidiary's revenue shown in the issuer's prospectus as net revenue is
incorrect and the
gross revenue should have been presented. The issuer has
undertaken to correct this in its next prospectus.
Other matters
116.
Other matters contained in letters to
issuers included:
(a)
non-disclosure of specific information required by
FRS-33; and
(b)
non-disclosure of information about financial
instruments.
Non-disclosure of specific information required by FRS-33
117.
In Cycle
6, eight finance companies were reviewed. These are defined as financial
institutions in NZ GAAP and are required, while
under previous NZ GAAP, to
comply with FRS-33.
118.
The Commission findings indicate that
such financial institutions should pay closer attention to FRS 33 requirements
when preparing
their financial statements.
119.
FRS-33 prescribes
the minimum standards of disclosure for financial institutions. The importance
of these disclosures is commented
on in the Introduction to this Standard:
"Financial institutions represent a significant and influential sector of
economic activity. Most individuals and organisations make
use of the financial
institutions as depositors, borrows, investors or as users of payments services.
Hence, besides shareholders
and ordinary creditors, there is considerable
interest among a wide range of other parties in the performance, financial
position,
and financial and investing activities of financial institutions,
particularly their solvency and the relative degree of risk attaching
to their
different activities."
120.
The following disclosure matters were
raised with issuers:
(a)
in relation to the liquidity management policy,
for failing to disclose a discussion of the effects of assumptions used in
quantifying
the liquidity position and the basis for those assumptions
(paragraph 11.4);
(b)
for failing to provide a description of
how impaired assets are managed (paragraph 10.5);
(c)
for
failing to disclose interest revenue from impaired assets, showing its
sub-categories (paragraph 6.3(a)(iv));
(d)
for failing to
disclose the movements in provisions for each class of assets (paragraph 10.4);
(e)
for failing to disclose the accounting policies for
recognition of revenue and or principal payments received and accounting
policies
for revenue due but not received, in respect of impaired assets
(paragraph 5.9); and
(f)
in relation to interest rate risk
(i)
for failing to disclose the methods used to monitor exposure to
interest rate risk (FRS-33 paragraph 12.3(c)); and
(ii)
for
failing to disclosure the systems and procedures for controlling interest rate
risk (FRS-33 paragraph 12.3(d)).
121.
One issuer
failed to explain in its financial statements the reasons for the change in the
comparative period's asset classification
from impaired to past due. The
issuer's financial statements show those assets as past due, the same amount is
shown as impaired
in the issuer's prior period financial statements. On enquiry
the issuer clarified that the classification shown in the prior period
financial
statements (as impaired assets) was an error and the classification shown in its
current financial statements (as past
due assets) is the correct classification.
The issuer should have explained the error and its effect and presented clearly
the change
in asset classification as a correction of a prior period error.
122.
FRS-33 requires information about impaired assets to be
disclosed in the financial statements, including the entity's accounting
policies
for impaired assets, criteria for classifying those assets, and
policies for recognising and determining their carrying amounts in
the statement
of financial position. To enable users of financial statements to assess the
quality of loans, financial institutions
are required to disclose the movements
from one reporting period to the next.
123.
The accounting
policies of one issuer did not provide a clear explanation of items recognised
as loans and advances. FRS-33 (paragraph
5.2) requires a financial institution
to "disclose the accounting policies for financial instruments with respect to
the basis for
recognising financial instruments in the financial reports".
124.
FRS 1 (paragraph 5.1) states that "financial reports shall
include clear and concise statements of all accounting policies adopted
by an
entity in the preparation of its financial reports, where such accounting
policies are material to those financial reports".
The Commission encourages
issuers to provide clear and concise policies that accurately portray the
practices of the issuer. For
example, if an entity capitalises interest at the
end of a contractual term when a new loan is advanced, the accounting policy
should
state this clearly.
125.
Accounting policy disclosure is a
fundamental disclosure in financial statements. Users need this information to
understand and interpret
the financial statements.
126.
Issuers
moving to NZ IFRS will find that accounting policy disclosures will need more
consideration under NZ IFRS given that NZ IFRS
contains some new requirements
for certain types of transactions such as financial instruments.
Non-disclosure of information about financial
instruments
127.
One issuer failed to disclose the contractual
repricing or maturity periods on term loan facilities as required by FRS-31:
Disclosure of Information about Financial Instruments (paragraph
6.14(b)).
Market matters
128.
The Commission raised several matters
relating to disclosures of substantial security holder information, director
share dealings
and non-compliance with NZX Listing Rules.
Substantial security holder
information
129.
Three issuers failed to provide substantial security
holder information to their shareholders. Two other issuers provided incorrect
substantial security holder information to their shareholders due to omissions
on the part of the issuer, or in some instances, the
substantial security
holders.
Failing to provide substantial security holder information to
shareholders
130.
The annual reports of three public issuers did not
include information on substantial security holders and on enquiry the three
issuers
confirmed that they had not sent a note to shareholders with the
required substantial security holder information. These are instances
of
breaches of section 26(1) of the Securities Markets Act 1988. In all three
cases, the appropriate disclosures were made by the
substantial security holder
to the registered exchanges and the issuers concerned.
131.
Section 26(1) of the Securities Markets Act requires the
public issuer to provide a note stating the substantial security holder's
name,
number of voting securities in which the holder has a relevant interest and the
total number of issued voting securities of
the public issuer. This note is to
be sent to each of its shareholders with the annual report sent under section
209 of the Companies
Act or the financial statements or summary financial
statements sent under section 210 of the Companies Act.
132.
Section 26(4) of the Securities Markets Act states that "a
public issuer who fails to comply with a requirement of this section commits
an
offence and is liable on summary conviction to a fine not exceeding $10,000".
133.
Issuers are reminded to take their obligations under section
26(1) of the Securities Markets Act seriously, notwithstanding that the
primary
obligation for such disclosures is on the substantial security holders. The
Commission will review these disclosures more
closely in future.
Providing incorrect or incomplete substantial security holder information to
shareholders
134.
Substantial security holder information on the number of
shares held and/or percentage of holding disclosed in the annual reports
of two
issuers did not agree with information disclosed in the Substantial Security
Holder Notice filed with NZX for the same period.
135.
In one
instance the error was due to the substantial security holder sending an
incorrect notice. This matter was brought to the attention
of the substantial
security holder to ensure a corrected notice was filed with NZX.
136.
The Securities Markets Act imposes certain
obligations on a person who is a substantial security holder in a public
issuer5 . A substantial security holder is a person who has
a relevant interest in listed voting securities that comprise 5% or more of a
class of listed voting securities of the public issuer (section 21(2)). The
substantial security holder is required to disclose changes
in that relevant
interest (in number or nature) to the issuer and to every registered exchange on
which the securities of the issuer
are listed (sections 23 and 24).
137.
The primary obligation is on the substantial security holder
to file such notices to ensure that the market is kept informed at all
times,
but the Securities Markets Act also imposes obligations on the public issuer of
the securities. Section 25 of the Securities
Markets Act requires the issuer to
maintain a file of substantial security holder notices received.
138.
In a separate instance the issuer omitted certain
substantial security holders from the annual report disclosures.
139.
The two issuers, referred to in paragraphs 135 and 138,
confirmed that their annual reports contained errors. Issuers should ensure
their annual report disclosures are accurate and comply with the Securities
Markets Act.
140.
The Securities Markets Act provisions relating
to substantial security holder disclosures were amended by regulations approved
by
the Cabinet on 3 December 2007. These regulations come into force on 29
February 2008 and are explained on the Commission's website
www.newsecuritieslaw.govt.nz.
141.
In future, failure to
comply with substantial security holder obligations will be a criminal offence,
subject to a fine of up to $30,000.
Civil penalties of up to $1 million can be
imposed by the Court, which can also make a range of orders relating to any
holding of
securities, including orders to forfeit or dispose of securities.
Director share dealings
142.
Three
issuers did not disclose director share dealings during the year in their annual
reports as required by the Companies Act, the
Securities Markets Act and NZX
Listing Rule 10.5.3(c).
143.
The Companies Act (section
211(1)(e)) requires the annual report of a company to state the particulars of
entries in the interests
register made during the accounting period. Section 148
of the same Act requires a director to disclose their share dealings to the
Board and ensure that that disclosure has been entered into the company's
interests register. The Securities Markets Act (section
19U) also requires the
directors of the issuer to disclose their relevant interests, and acquisitions
or disposals in the interests
register.
144.
NZX Listing Rule
10.5.3(c) requires the annual report of a company to contain the information
required by section 211 of the Companies
Act.
145.
In disclosing
the particulars of the interests register, as required by the Companies Act, the
issuer is required to state the following
(section 148(2)):
(a)
the
number and class of shares in which the relevant interest has been acquired or
disposed of; and
(b)
the nature of the relevant interest; and
(c)
the consideration paid or received; and
(d)
the date of the acquisition or disposal.
NZX referral
146.
One issuer failed to
disclose material information, related to a restriction on the timing of any
future acquisition of a business,
in its annual report in accordance with the
NZX Listing Rules.
147.
NZX Listing Rule 10.5.1(d) requires the
annual report of the issuer to contain all information required in a preliminary
announcement.
Appendix 1(j) states that this includes any significant
information needed by an investor to make an informed assessment of the entity's
financial performance and financial position.
148.
This matter
has been referred to the NZX.
ONGOING REVIEW AND ENFORCEMENT
149.
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 aspects of NZ
GAAP.
(a)
a person who is a party to a listing agreement with a registered exchange;
(b)
a person who was previously a party to a listing agreement with a registered exchange, in respect of any action or event or circumstances to which this Act applied while the person was a party to a listing agreement with a registered exchange.
(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 received:
(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:
(c)
In relation to an interest in a contributory mortgage offered by a contributory mortgage broker, or to an 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.
Part I defines a reporting entity as :
(a)
An issuer; or
(b)
A company, other than an exempt company; or
(c)
A person that is required by any Act, other than this Act, to comply with this Act as if it were a reporting entity.
* * * * *
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