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New Zealand Securities Commission |
Last Updated: 15 November 2014
FINANCIAL REPORTING SURVEILLANCE PROGRAMME
REVIEW OF FINANCIAL REPORTING BY ISSUERS
For the period ending 30 June 2008 – 31 December
2008
CYCLE
9
Securities Commission New Zealand
Level 8, Unisys House
56 The Terrace
P O Box 1179
WELLINGTON 6011
August 2009
CONTENTS
EXECUTIVE SUMMARY
.....................................................................................................
2
INTRODUCTION....................................................................................................................3
CYCLE 9 FINDINGS
..............................................................................................................
3
Scope and issuer selection
...................................................................................................
3
Overall comments on Cycle
9..............................................................................................
3
Outcome of matters raised
...................................................................................................
4
Specific comments on Cycle 9 findings .............................................................................. 5
Financial instrument disclosures........................................................................................ 5
Related party information and key management personnel compensation ....................... 7
Impairment of assets .......................................................................................................... 8
Significant judgements and estimates ................................................................................ 9
Miscellaneous
matters......................................................................................................
10
Market
matters...................................................................................................................
11
CONCLUSION
......................................................................................................................12
ONGOING REVIEW AND ENFORCEMENT
..................................................................
12
APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL
REPORTING SURVEILLANCE PROGRAMME ....................................
13
The Commission’s Financial Reporting Surveillance
Programme...................................... 13
New Zealand Generally Accepted Accounting
Practice...................................................... 14
Selecting issuers
...................................................................................................................
14
Identifying matters and taking action .................................................................................. 15
2
22
EXECUTIVE SUMMARY
The Securities Commission of New Zealand has completed Cycle 9 of its Financial Reporting
Surveillance Programme (FRSP). This report presents our findings.
The Commission reviewed the annual reports of 24 issuers, with balance dates from 30 June
2008 to 31 December 2008.
The overall quality of financial reporting by issuers in Cycle 9 was
satisfactory. Notwithstanding that financial reporting was generally
good in
many areas, in Cycle 9 the Commission continued to find inadequacies in matters
that were previously alerted to issuers in
our news releases and in previous
public reports.
The Commission wrote to 17 of the 24 issuers mainly about:
• financial instrument disclosures;
• related party information and key management personnel compensation;
• impairment of assets; and
• disclosure of management judgements and estimates.
Thirty-two percent of all matters raised with issuers in Cycle 9 were
resolved through further information and clarification. In 65% of
matters raised issuers agreed to revise or enhance disclosures in their
future financial statements (change agreed). In the remaining case
subsequent correspondence was entered into with the issuer to close the matter
off by reiterating the Commission’s
comments (second
letter).
The Commission will follow up and review the next annual reports of those
issuers who have agreed to make the necessary changes to
ensure that those
matters raised have been taken into account.
None of the matters identified, and already dealt with, warranted the
Commission taking any enforcement action or making any referrals
to any other
appropriate body.
Concluding comments
Comprehensive, transparent and timely financial reporting is essential to
restore investor and market confidence in the securities
market. In this respect
our reviews indicate there is still scope for improvement. In particular the
Commission urges issuers to
pay specific attention to their disclosures relating
to financial instruments, impairment of non financial assets and valuation
assumptions
ensuring that these disclosures are comprehensive and
transparent.
INTRODUCTION
1. The Securities Commission’s Financial Reporting Surveillance
Programme (FRSP) is an ongoing surveillance programme.
This report sets out
findings from Cycle 9 of the FRSP.
2. Appendix 1 sets out the background to the Commission’s FRSP,
including how issuers are selected for review and how matters
are dealt with
when identified.
CYCLE 9 FINDINGS Scope and issuer selection
3. In Cycle 9 the Commission reviewed the annual reports of 24 issuers
with balance dates from 30 June 2008 to 31 December 2008.
4. The 24 issuers were:1
(a) 13 issuers listed on the equity security market (NZSX) of NZX Limited (NZX); (b) 4 issuers with debt listed on the debt security market (NZDX) of NZX;
(c) 1 issuer listed on both the NZSX and the NZDX;
(d) 1 issuer listed on the alternative market (NZAX) of NZX;
(e) 1 issuer listed on both the NZAX and the main board equity security market of the Australian Stock Exchange (ASX);
(f) 1 issuer listed on the Unlisted exchange; and
(g) 3 issuers whose shares are not listed on any exchange.
5. No issuer from Cycle 8 was reselected for review. Three financial
institutions were selected for review.
6. Of the financial statements reviewed, 23 were prepared under NZ IFRS and one under
US GAAP.
Overall comments on Cycle 9
7. The Commission considers that issuers’ overall compliance
with NZ IFRS is satisfactory. Notwithstanding that
compliance with NZ IFRS
was generally good in many areas, in Cycle 9 the Commission continued to find
inadequacies in matters that
were previously alerted to issuers in our news
releases and in previous public reports. These matters include:
(a) financial instrument disclosures;
(b) related party information, in particular, key management personnel compensation;
(c) impairment of assets and associated disclosures;
1 The number of issuers reviewed in Cycle 9 is less than previous
cycles due to the lower number of issuers with a December balance
date.
(d) significant judgements, key assumptions and major sources of estimation uncertainty; and
(e) significant assumptions relating to valuation of investment
properties;
8. Seventeen of the 24 issuers’ annual reports reviewed contained
matters that prompted the Commission to write to the
issuers. In writing to the
issuers on the 31 matters raised, the Commission also drew the attention
of those issuers to 26 other matters.
Outcome of matters raised
9. Table 1 shows the outcome of matters raised in Cycle
9.
Notes
|
Table 1: Outcome of matters raised
Outcome
|
Matters raised 2
|
%
|
(1)
|
Resolved
|
10
|
|
(2)
|
Point taken/change agreed
|
20
|
|
|
Agreement reached
|
30
|
97%
|
(3)
|
Second letter sent
|
1
|
|
(4)
|
Other follow-up action
|
0
|
|
|
|
1
|
3%
|
|
Total matters raised
|
31
|
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 subsequent financial statements.
(3) Second letter sent: a second or subsequent 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.
10. The Commission again notes that the responses from issuers explained
and clarified many of the matters raised. The Commission is pleased with
the high percentage of agreement reached with issuers based on the initial
letter.
11. However, the Commission continues to remind issuers to ensure that all
disclosures are sufficiently transparent, complete and
coherent to explain
matters included in their financial statements.
12. The Commission will follow up and review the next annual reports of
the issuers to ensure that matters raised with them previously have been
taken into account.
2 The matters raised exclude the instances where the
Commission had written directly to audit firms and/or directors of
issuers.
Specific comments on Cycle 9 findings
Figure 1: Top Matters Raised
7
6
5
1**
4
3
2 4*
1
0
Financial instrument disclosures
Related party disclosures
Impairment of non- financial assets
Significant judgments and estimates
* Key management personnel compensation disclosures
** Other related party disclosures
Financial instrument disclosures
14. Financial instrument3 disclosures continue to be a problem
area. In the current environment these disclosures are particularly important to
enable users
to assess the liquidity, market and credit risks of an
entity’s financial instruments. However, some entities fail to make
all
the disclosures required by NZ IFRS 7 Financial instruments: disclosures.
In particular, the Commission wishes to highlight the inadequate disclosures
relating to liquidity risk and fair value assumptions.
Liquidity risk disclosures
15. We have observed over recent cycles that some financial
institutions are failing to comply with all the liquidity risk disclosures
required by NZ IFRS 7.
16. All entities are required to disclose for each type of risk arising
from financial instruments, including liquidity risk,
summary quantitative data
about their exposure to that risk at the end of the reporting period. This
disclosure must be based on
the information provided internally to key
management personnel, for example the entity’s board of directors or
chief
executive officer (NZ IFRS 7, paragraph 34).
3 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’.
These disclosures are intended to provide a useful insight into how the
entity views and manages risk.
17. In addition, financial institutions must comply with Appendix E of NZ IFRS 7.
Appendix E (paragraph 20) requires that in the absence of sufficient
information regarding liquidity risk, financial institutions
that manage their
liquidity risk on the basis of expected maturity dates are required to provide
an analysis of financial instruments
on this basis.
18. Besides the liquidity risk disclosures in NZ IFRS 7, we also draw
issuers’ specific attention to another liquidity-related
disclosure
requirement. NZ IAS 1 Presentation of financial statements (paragraph 61)
requires all entities to disclose, for each line item presented in the
statement of financial position, the amount expected to be recovered or
settled within and after the twelve months following the end of the reporting
period.
19. For some entities the contractual maturity analysis required
by NZ IFRS 7 (paragraph 39) may represent similar
information to that used by
key management personnel to manage their liquidity risk. However, we expect that
most financial institutions
manage their liquidity risk on the basis of the
expected maturities of their financial instruments. For example, where a
financial
institution has a significant proportion of deposits that are
repayable on demand but are not expected to be withdrawn in the near
future.
Therefore, the quantitative liquidity risk disclosures of financial institutions
should, in addition to the contractual maturity
analysis, disclose the expected
maturities of their financial instruments.
20. The Commission has observed that many financial institutions do not
provide any quantitative information other than a contractual
maturity analysis.
The Commission considers this non-disclosure unacceptable. The issuers we have
written to have agreed to make
additional disclosures that reflect how they
manage their liquidity risk. The Commission will review their next financial
statements
to ensure these disclosures have been made.
21. An entity we wrote to cited a lack of industry practice of making these disclosures.
We remind issuers that to assert compliance with NZ IFRS requires compliance
with all applicable standards and interpretations.
Entities should not
fail to disclose required information simply because other entities are
failing to do so.
Fair value assumptions
22. NZ IFRS 7 (paragraph 25), with limited exceptions, requires
entities to disclose the fair value4 of each class of financial
assets and liabilities in a way that permits comparison with its carrying
amount.
23. NZ IAS 39 Financial instruments: recognition and measurement
contains a hierarchy for determining the fair value of financial
instruments. The best evidence of fair value is quoted prices in
an active
market (paragraph 48). If the market for a financial
4 Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in
an arm’s
length transaction.
instrument is not active entities are required to establish fair value by
using valuation techniques.5 During stressed market conditions
the Commission anticipates that entities will need to increase their reliance
on valuation
techniques to establish the fair value of their financial
instruments. This requires more judgement on the part of the issuer.
24. Consistent with this increase in judgement NZ IFRS 7 (paragraph
27(a)) requires entities to disclose:
“the methods and, when a valuation technique is used, the
assumptions applied in determining fair values of each class of financial
assets or financial liabilities. For example, if applicable, an entity discloses
information about the assumptions relating to prepayment rates, rates of
estimated credit losses, and interest and discount rates.”
[emphasis
added]
25. The Commission has observed that several issuers use
valuation techniques to measure the fair value of their interest
rate swaps.
However, the issuers did not disclose the assumptions applied in determining
those fair values. The disclosures the issuers
made only included the method of
valuation and a general reference that market interest rates were used to
discount the cash flows
relating to the swaps.
26. The Commission considers that the actual assumptions applied in
determining the fair values of interest rate swaps should
be disclosed. The
Commission does not consider that general disclosures such as ‘market
rates were applied’ are sufficient
to meet the requirements of paragraph
27(a) of NZ IFRS 7.
27. The issuers written to have agreed to make further
disclosures to comply with paragraph 27(a) of IFRS 7.
Related party information and key management personnel
compensation
28. The Commission considers that related party disclosure is an area that
still needs some improvement.
Key management personnel compensation
29. As with Cycle 8, the majority of instances of inadequate disclosure of
related party information in Cycle 9 relate to key management
personnel
compensation disclosures.
30. NZ IAS 24 Related party disclosures (paragraph 16) requires
certain information to be disclosed about key management personnel compensation
in total and for each of the
specified categories. Common errors in disclosures
are:
(a) exclusion of non-executive directors’ fees or other compensation;
(b) exclusion of share-based payments made to any key management personnel;
and
5 Valuation techniques include using recent arm’s length
market transactions between knowledgeable willing parties, reference
to the
current fair value of another instrument that is substantially the same,
discounted cash flow analysis and option pricing
models.
(c) exclusion of directors’ fees from total key management personnel
compensation.
31. This matter was discussed in detail in our Cycle 8 public report.
However, the Commission wishes to emphasise that key management
personnel
includes any director of the issuer, whether executive or otherwise (NZ IAS 24,
paragraph 9).
Entities that have key management personnel in common
32. NZ IAS 24 (paragraph 17) requires disclosure of the nature, amounts
and outstanding balances of any transactions between an
entity and its related
parties. NZ IAS 24 states that two entities are not necessarily related parties
by virtue of having common
key management personnel. However, the definition of
a related party does capture entities that are controlled, jointly controlled
or
significantly influenced by a member of the reporting entity’s key
management personnel (paragraph 9).
33. In Cycle 9 the Commission wrote to a director of an issuer who was
also a member of the key management personnel of one of
its suppliers. From the
entity’s interests register disclosures the Commission determined that it
was likely that the role
of that director with the entity’s supplier gave
that director significant influence within the supplier. However, the entity
had not identified its supplier as a related party or provided details
of the transactions between the entities.
34. The Commission reminds issuers that ‘significant
influence’ only requires that the member of key management personnel
has
the power to participate in the financial and operating decisions of the other
entity (NZ IAS 24, paragraph 9). Therefore entities
should carefully consider
the external roles of its key management personnel in other entities when
identifying its related parties.
Impairment of assets
35. The Commission urges issuers to ensure any impairment is recognised on
a timely basis and details of impairment testing are
fully disclosed.
36. In Cycle 9 the Commission wrote to four issuers with regard to their
impairment testing and related disclosures. The Commission
was pleased to note
that in each of these cases, the issuers were able to demonstrate that
impairment testing had been performed.
However, there is scope for improvement
in the disclosures of impairment testing. This is discussed in more detail
below.
Impairment testing for interim reporting
37. NZ IAS 36 Impairment of assets (paragraph 9) requires that
entities assess, at the end of each reporting period, whether there is any
indication that any non-financial
asset may be impaired. Entities also need to
assess assets for impairment at the end of each interim reporting period. If any
such
indication exists, the entity must estimate the recoverable amount of that
asset.
38. In relation to one issuer the Commission noted that events had
occurred within its interim reporting period that indicated
that the
carrying value of one of its cash-
generating units (CGUs) and associated goodwill could be materially impaired.
However, there was no disclosure of the results of any
impairment testing
performed in the issuer’s interim financial statements.
39. The Commission wrote to the issuer to confirm that impairment
testing had been performed. We were pleased to note
that the issuer had
performed impairment testing at a detailed level and used independent advisers
to assist in the process.
40. In complying with NZ IAS 34 Interim reporting entities as a
minimum must disclose condensed financial statements and selected explanatory
notes. While NZ IAS 34 does not specifically
require entities to disclose any
details of impairment testing performed, entities must disclose any information
that is material
for an understanding of the interim report.
41. Disclosure of impairment testing provides additional assurance to the
users of the financial statements that assets are properly
valued. In the
current economic climate, the Commission encourages entities to disclose
additional information in their interim financial
statements of any impairment
testing performed.
Disclosure of cash generating units and assumptions
42. Cash-generating units to which goodwill has been allocated
must be tested for impairment at least annually, as well
as whenever there is
an indication that the unit may be impaired (NZ IAS 36, paragraph 90).
43. NZ IAS 36 (paragraph 134) specifies the disclosures required for each
CGU for which the carrying amount of goodwill is significant
and impairment
testing has been performed using a value-in-use calculation. These disclosures
include the growth rate used to extrapolate
cash flow projections and the
discount rate(s) applied to the cash flow projections.
44. The Commission has observed that some entities are not making these
disclosures or simply describing these assumptions generically.
Unless the
goodwill balance is not significant these disclosures must be provided in
quantitative form.
45. In addition the Commission noted that one issuer had disclosed that
goodwill was allocated to seven CGUs. However, for disclosure
purposes the
information required by NZ IAS 36 (paragraph 134) had been aggregated into two
of the entity’s business segments.
The Commission notes that the
disclosures of paragraph 134 must be provided for each CGU to which the
carrying amount
of goodwill is significant. Aggregation of CGUs for disclosure
purposes reduces the usefulness of the disclosures and is not permitted
by NZ
IAS 36.
Significant judgements and estimates
46. NZ IAS 1 (paragraph 122) requires entities to disclose the
judgments, apart from those involving estimations, that management
has made in
the process of applying the entity’s accounting policies and that have the
most significant effect on the amounts
recognised in the financial
statements.
47. NZ IAS 1 (paragraph 125) also requires entities to disclose
information about the assumptions made about the future and
other sources of
estimation uncertainty at the end of the reporting period, that have a
significant risk of resulting in a material
adjustment to the carrying amount of
the assets and liabilities.
48. The disclosures required by NZ IAS 1 (paragraphs 122 and 125) are
designed to draw users’ attention to the most subjective
areas of the
financial statements and are therefore of great importance. While NZ IAS 1 does
not prescribe the format that these
disclosures should take, the disclosures
should be in a user-friendly format.
49. The Commission notes that these disclosures are generally not well made by issuers.
Issuers should clearly distinguish between judgements management has made in
the process of applying the entity’s accounting
policies and sources of
estimation uncertainty. The Commission also notes that elements of some
issuers’ disclosures are unnecessarily
dispersed throughout the financial
statements. Preferably this information should be disclosed in the same
section of the financial
statements. When this is not practical clear
cross-references to all relevant information should be disclosed.
Miscellaneous matters
Fair value assumptions relating to investment properties
50. NZ IAS 40 Investment properties (paragraph 75(d)) requires
disclosure of the assumptions applied in determining the fair value of
investment property. In addition
to the five issuers written to in Cycle 8, the
Commission wrote to an additional issuer in Cycle 9. The issuer agreed to make
additional
disclosures in its next financial statements.
Foreign exchange gains and losses
51. The value of the New Zealand dollar has fluctuated considerably in
recent times. In order for users to assess the impact
of changes in foreign
exchange rates on financial performance and financial position, entities should
clearly disclose translation
gains and losses.
52. NZ IAS 21 The effects of changes in foreign exchange rates
requires the disclosure of translation gains or losses recognised in the
income statement and in other comprehensive income (paragraph
52). The
Commission wrote to one issuer that had not disclosed foreign exchange
translation gains or losses despite having significant
overseas operations. The
issuer agreed to make additional disclosures in their next financial
statements.
Statement of compliance with IFRS
53. The Commission is pleased to note that the proportion of issuers
failing to include an unreserved statement of compliance with
IFRS in their
financial statements as required by NZ IAS 1 (paragraph 16) has decreased. The
Commission wrote to 4 of the 24 issuers
on this matter compared with 18 of the
40 issuers reviewed in Cycle 8.
54. The Commission discussed this matter in detail in its Cycle 7 report.
The Commission’s view is that making this statement
is relatively easy but
will significantly increase the confidence that overseas investors have that New
Zealand issuers have adopted
an internationally recognised basis of
accounting.
Description of non audit services provided
55. In addition to disclosure of external audit fees, NZ IAS 1
Presentation of financial statements requires entities to disclose
amounts paid to their external auditors for assurance related services, tax
services and other services.
Entities are also required to describe the nature
of the services provided in each of these categories (NZ IAS 1, paragraph
NZ105.1).
56. The Commission has observed that while entities usually disclose fees
paid by the required categories, some entities do not
describe the nature of
those services. The additional requirement to describe the nature of the
services was not required under previous
NZ GAAP.
Market matters
57. The Commission also wrote to:
(a) 1 issuer about substantial security holder information under section 35F of the
Securities Markets Act 1988;
(b) 2 issuers about information on directors’ and relevant interests or directors’ share dealing under sections 148 and 211 of the Companies Act 1993 and/or directors and officers obligations under section 19U of the Securities Markets Act; and
(c) 1 audit firm about services, other than audit services, that they
had provided to the issuers.
58. No enforcement action was undertaken in relation to market matters
raised with issuers or with directors.
CONCLUSION
59. In a recent speech Robert Herz (Chairman of the US Financial Accounting Standards
Board) stated:
“Transparency is not just a buzz word or a cliché. It is a
fundamental and absolutely essential attribute of
sound financial
markets. Relevant, trustworthy, and timely information is the oxygen of
financial markets. Depriving markets
of such information—or polluting the
information—can have very adverse consequences.”6
60. The Commission remains of the view that the priority for issuers,
auditors, standard- setters and other market professionals
in the current
economic environment is to ensure that complete and transparent disclosures are
provided in the financial statements
of issuers to restore investor and market
confidence in the securities market. This requires, where necessary, the
inclusion of explanatory
disclosures to support the financial information that
is presented.
61. New Zealand issuers should pay particular attention to improving their
disclosures in relation to financial instruments, related
parties, impairment
testing as well as management judgements and estimates. Issuers should also
carefully consider what information
in addition to the minimum requirements
should be disclosed in their interim financial statements.
ONGOING REVIEW AND ENFORCEMENT
62. The Commission will continue to review issuers’ financial reporting as part of its
Financial Reporting Surveillance Programme.
63. The Commission appreciates that issuers may face difficulties when
reporting in the current market environment. In particular,
entities are likely
to find valuation of both financial instruments and non-financial assets subject
to a higher degree of judgement.
Therefore it is very important for these
entities to be transparent and disclose clearly their specific underlying
assumptions and
estimates. When circumstances change users can re-assess the
information based on new assumptions.
64. In addition, the Commission will follow up and review the next annual
reports of those issuers who have agreed to make the
necessary changes to ensure
that those matters raised have been taken into account.
65. The Commission will take any appropriate steps to encourage and ensure
compliance with NZ IFRS (and other aspects of NZ GAAP)
and relevant
legislation.
6 Hertz, R.H. (2009) “History Doesn’t Repeat Itself, People Repeat History – Front-Line Thoughts and
Observations on Creating a Sounder Financial System.” Available
online at: http://www.fasb.org/
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
issuers7 to be fundamental 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
(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:
(a) issuers’ financial statement disclosures are clear and comprehensive;
(b) investors can have confidence in the credibility of financial information provided by issuers; and
(c) high quality financial reporting contributes to the integrity of New
Zealand’s securities markets.
6. The FRSP involves reviews of 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.
7 An issuer is defined by the Securities Act 1978 (section 2) to mean:
(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.
New Zealand Generally Accepted Accounting Practice
7. Under the Financial Reporting Act 1993 issuers are required 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 relate8.
8. The Commission reviews financial statements of issuers 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 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.
10. 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 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
(c) the overall quality of financial reporting practices by issuers.
Selecting issuers
11. The FRSP aims to review all issuers listed on NZX Limited (NZX) at
least once over a three to four year period.
8 Part 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
(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.
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 which have a recognised stock exchange as the home
exchange and are also
listed on NZX.
13. Dual listed issuers are issuers incorporated in Australia which are on the Australian
Stock Exchange’s (ASX) Official List and which are also listed on the
NZX.
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 so, 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 a
matter about an issuer that it considers
to be significant to an applicable
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 Unlisted9 exchange and issuers
not listed on any exchange may be also included in the cycle reviews.
16. Issuers may be selected based on particular criteria as determined
by the Commission: issuers may be selected based 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 subsequent
review where the nature of issues identified in an earlier cycle raised
concerns.
Identifying matters and taking action
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 raised10 or other matters.
Matters raised include market matters.
19. Matters raised are matters that are important or
where further clarification or information is needed. For example, the
Commission is likely
to write to an issuer where a matter:
(a) appears to be wrong;
(b) does not appear to make sense;
9 Unlisted 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.
10 Prior to Cycle 6, the Commission referred to matters raised
as significant matters.
(c) is not clear and lacks transparency; (d) seems unusual or irregular;
(e) raises questions about its validity; or
(f) is insufficiently explained.
20. Financial reporting requires the exercise of professional
judgement. The Commission takes this into account when reviewing
the
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 feedback to the issuer. 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 to maintain and improve the
standard of financial reporting in New Zealand.
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 is identified that may have a significant market
impact the matter 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
are considered likely to be a breach of:
(a) the Financial Reporting Act;
(b) the Rules or the Code of Ethics of the New Zealand Institute of Chartered
Accountants; or
(c) the NZX Listing Rules.
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