Financial reporting surveillance program. Review of financial reporting by issuers cycle 10 [2009] NZSecCom 8 (18 December 2009)

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EXECUTIVE SUMMARY .................................................................................................................. 2

INTRODUCTION................................................................................................................................. 4

CYCLE 10 FINDINGS ......................................................................................................................... 4

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

Overall comments on Cycle 10............................................................................................ 4

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

Specific comments on Cycle 10 findings ............................................................................ 5

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

Impairment of non-financial assets ................................................................................................ 8

Related party information .............................................................................................................. 9

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

The composition of other expenses............................................................................................... 11

Description of non-audit services provided ................................................................................. 11

Miscellaneous matters.................................................................................................................. 11

Market matters................................................................................................................... 12

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

ONGOING REVIEW AND ENFORCEMENT ............................................................................... 13

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

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

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

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

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

This report presents the findings of Cycle 10 of the New Zealand Securities Commission’s Financial Reporting Surveillance Programme (FRSP). The Commission reviewed the annual reports of 20 issuers with balance dates from 31 January 2009 to 31 March 2009.

Compliance was generally good in many areas and the Commission’s view is that issuers’ financial statements, in general, reflect a level of compliance with NZ IFRS that is appropriate for a developed capital market like New Zealand.

However, there is still much room for improvement before the implementation of NZ IFRS can fully deliver on its potential for greater transparency across the New Zealand market. In this review, the Commission was disappointed to encounter persistently inadequate disclosures in certain critical reporting areas. We have warned issuers that they should make greater efforts to comply in these areas, and that, where necessary, we will take enforcement action.

As a result of this review, the Commission is considering matters raised with two issuers as part of its enforcement work.

The Commission wrote to 17 of the 20 issuers assessed. The main matters raise were:

(a) financial instruments, particularly the non disclosure of fair value assumptions, the expected maturity of financial instruments and estimates of the fair value of collateral held;

(b) impairment of non-financial assets, particularly the non disclosure and reasonability of assumptions underlying goodwill and intangibles impairment testing;

(c) related party information, including omissions from key management personnel compensation disclosures and the non disclosure of terms and conditions of related party transactions;

(d) valuations of property, plant and equipment, particularly a lack of disclosure of the assumptions underlying such valuations;

(e) the composition of “other expenses” – we note some issuers are not providing sufficient descriptions for significant amounts of their expenditure;

(f) the non disclosure of the nature of non audit services provided by auditors.

We consider such disclosures to be particularly important when the amounts derived are based on significant judgements and estimates.

We remind directors of issuers that ensuring financial statements meet applicable standards is one of their fundamental duties. In failing to do so, directors could be failing in their duty to inform investors about their entities’ business activities. Directors should thoroughly review financial statements to ensure they fairly reflect the entity’s financial position and performance. Where directors believe information to be obscure or unrepresentative of the entity’s operations, they must provide additional disclosures. In today’s volatile economic conditions, simply bringing forward the previous years’ disclosure format is rarely appropriate.

The Commission appreciates that a number of entities are struggling with the requirements of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS): they are complex and demanding. To help educate the market through the Financial Reporting Surveillance Programme, the Commission provides feedback and guidance to preparers of financial reports, and their auditors and other advisers. We recognise that proper compliance with NZ IFRS is a continuous improvement process as issuers gain more experience and become more familiar with the detailed requirements.

Notwithstanding this, where the Commission views a matter as serious, it will take enforcement action.

1. This report sets out findings from Cycle 10 of the Commission’s ongoing Financial

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

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

3. The Commission reviewed the annual reports of 20 issuers with balance dates from 31

• 3 with securities listed on both the NZSX and debt security market (NZDX) of

5. Compliance was generally good in many areas, but we continued to encounter financial reporting issues similar to those about which issuers had already been alerted to in our earlier news releases and public reports. This is disappointing. Our expectation in raising issues, and our purpose in reporting on our FRSP findings, is to relay to issuers and their auditors the areas where we consider financial reporting could and should be improved. We do not expect to have to raise the same or similar matters with other issuers cycle after cycle.

(a) financial instruments, particularly the non disclosure of fair value assumptions, the expected maturity of financial instruments and estimates of the fair value of collateral held;

(b) impairment of non-financial assets, particularly the non disclosure and reasonability of assumptions underlying goodwill and intangibles impairment testing;

(c) related party information, including omissions from key management personnel compensation disclosures and the non disclosure of terms and conditions of related party transactions;

(d) valuations of property, plant and equipment, particularly a lack of disclosure of the assumptions underlying such valuations;

(e) the composition of “other expenses” – we note some issuers are not providing sufficient descriptions for significant amounts of their expenditure;

(f) the non disclosure of the nature of non audit services provided by auditors.

Notes	Table 1: Outcome of matters raised Outcome	Matters raised ¹	%
(1)	Resolved	14
(2)	Point taken/change agreed	26
	*Agreement reached*	40	83%
(3)	Second letter sent	2
(4)	Other follow-up action	6
		8	17%
	Total matters raised	48	100%

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

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

(4) Other follow-up action: more action required eg a request in writing for answers to further questions.

8. Many issuers explained and clarified matters raised. In other cases, issuers agreed, as a result of our raising issues, to make changes to their next set of financial statements. The Commission is pleased with the high rate of agreement resulting from our initial letter. However, our preference is for issuers to ensure that their financial statements comply with NZ IFRS and contain all the necessary information for users of their financial reports to make informed decisions.

9. We will follow up and review issuers’ next annual reports to ensure matters raised with them have been taken into account.

10. Figure 1 shows matters most frequently raised with issuers, each of which is discussed in more detail below.

¹Matters raised exclude instances where the Commission wrote directly to audit firms and/or directors of issuers.

0
	Financial instrument disclosures	Impairment of non financial assets	Related party disclosures	Valuation of property, plant and equipment	Other Expenses	Non audit services disclosure

11. Financial instruments continue to dominate inadequate disclosures in financial statements. Accounting for financial instruments can be a complex area requiring a complex set of disclosures and the International Accounting Standards Board IASB is currently reviewing this area with the aim of simplifying the requirements.

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

13. 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”.

14. Financial instruments disclosures are important because they allow users to assess the liquidity, market risk and credit risks of an entity’s financial instruments. This is crucial in today’s rapidly changing economic conditions and given the overall unpredictability of financial markets. The Commission reminds issuers that if there are material changes in their financial instruments NZX’s continuous disclosure requirements apply. If the Commission’s view is that a matter that is significant is not properly accounted for or disclosed, it will take enforcement action.

15. NZ IFRS 7 Financial instruments: Disclosures prescribes disclosures for financial instruments.

16. Most NZ IFRS 7 matters raised in Cycle 10 were raised with financial institutions.

17. NZ IFRS 7 (paragraph 25), with limited exceptions, requires entities to disclose the fair value of each class of financial assets and financial liabilities in a way that permits comparison with its carrying amount.

18. 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.

19. NZ IFRS 7 requires that where an entity uses a valuation technique to determine the fair value of a class of financial assets it must disclose the valuation technique used and the actual assumptions applied. Paragraph 27(a) cites prepayment rates, rates of estimated credit losses, and interest or discount rates as examples.

20. Many entities use valuation techniques to measure the fair value of their financial instruments, but fail to provide such information, despite material movements in the carrying value of their financial assets. We note that several entities merely describe in general terms the techniques used.

21. The Commission reiterates that NZ IFRS 7 requires that, where a valuation technique is used to determine fair value, the actual assumptions applied must be disclosed. We do not consider general disclosures, such as “market rates were applied”, sufficient to meet NZ IFRS 7 (paragraph 27(a)) requirements.

23. Our Cycle 9 report noted that, while many financial institutions managed their financial instruments on the basis of expected maturities, they did not provide the expected maturity analysis NZ IFRS 7 (paragraph E20) requires. For Cycle 10 we wrote to two financial institutions about non-disclosure of information on the expected maturity of their financial instruments.

24. We are pleased to see, however, that four of the financial institutions reviewed had commented and/or included information on the expected maturity of their financial instruments. Two financial institutions disclosed that the only material difference between their contractual maturity and the expected maturity of their financial instruments was their loans receivable. This was followed by a separate line item under its contractual maturity analysis showing the expected maturity of the loans receivable. The Commission considers the disclosures added useful information without adding unnecessary detail and length to issuers’ financial statements, and we encourage the practice.

25. The Commission is pleased to see expected maturity analysis becoming normal disclosure for these financial institutions, and strongly encourages other financial institutions, where applicable, to disclose the same. We also urge all financial institutions to pay close attention to their liquidity risk disclosures, particularly those with large property-sector exposures.

26. NZ IFRS 7 (paragraph 37(c)) requires an entity to disclose, in relation to past due or impaired financial assets, both a description of the collateral and other credit enhancements the entity holds as security and, unless impracticable, a best estimate of their fair value.

27. Two matters raised related to issuers’ failure to disclose an estimate of the fair value of collateral in relation to such financial assets. The Commission considers financial institutions would usually obtain fair value information when accepting those assets as collateral.

28. We think it important that issuers provide information on the loss they might incur in the event of default by the counterparties to their financial instruments. This information is particularly important in the case of past due and impaired financial assets: because often the credit risk attached to these assets is the greatest. Information about the fair value of collateral and other credit enhancements gives users an indication of the net loss the entity might incur in the event of default.

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

30. The Commission wrote to five issuers about their impairment testing of goodwill, indefinite life intangible assets (brands) and other intangible assets (customer relations). Our enquiries related to possible inadequate impairment testing as well as inadequate disclosure of assumptions underlying such testing.

31. NZ IAS 36 Impairment of assets requires cash-generating units (CGU) to which goodwill has been allocated to be tested for impairment at least annually, as well as whenever there is an indication the unit may be impaired (paragraph 90). A cash- generating unit is 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. Where the carrying amount of a CGU is less than the recoverable amount, an entity must write down the value of that CGU. The recoverable amount of an asset or CGU is the greater of the net cash flow expected to be recovered through its continued use or that would be realised through its sale. That is, the recoverable amount is the higher of its value in use or its fair value net of costs to sell.

32. 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

²See article in the December 2009 issue of the New Zealand Institute of Chartered Accountants’ Journal by Lay

used to extrapolate cash flow projections and the discount rate(s) applied to the cash flow projections. These disclosures provide information on the forecast performance of the CGU, allowing users to make informed judgements about asset valuations.

33. The Commission notes, however, that some entities continue describing assumptions in general terms or make no disclosures. We emphasise that, unless the goodwill balance is insignificant, these disclosures must be provided in quantitative form. Having a recoverable amount with “considerable headroom” above the carrying amount of the asset being tested for impairment is not a sufficient reason for failing to provide required disclosures. Entities should note that assumptions and estimates must represent the best information management has access to and be reasonable and supportable. We caution them against using overly optimistic or overly conservative assumptions in their valuations, as either can give a misleading impression of the CGU’s current value and future performance.

34. One entity that disclosed the actual assumptions used had used the same valuation assumptions for its CGU in three different countries, where one would have expected different assumptions to be used. Entities must adjust discount rates for specific CGU risks and not just use, say, weighted average cost of capital for all their CGU. NZ IAS

36 (paragraph 134(d)(ii)) requires management’s approach to determining the value(s) assigned to each key assumption to be disclosed, including whether these reflect past experience or, if appropriate, are consistent with external sources of information. If the assumptions are inconsistent how and why they are inconsistent must be disclosed.

35. It is important to note that the requirement in NZ IAS 36 (paragraph 134) to disclose assumptions applies not only to goodwill but also to indefinite life intangible assets.

36. The Commission urges issuers to ensure details of impairment testing and, in particular, their underlying assumptions and estimates, are fully disclosed. We recommend providing a sensitivity analysis where appropriate.

37. We were pleased to find that, in reviewing a CGU for impairment, one entity not only disclosed the growth and discount rates applied but also the earnings before interest taxes, depreciation and amortisation (EBITDA), and capital expenditure assumptions. It supplemented this disclosure with commentary on the source of the assumptions and a sensitivity analysis showing the percentage change required for each key variable which would result in the cash generating unit being impaired. Such analysis greatly enhances the ability of users to judge the valuation of the assets. We encourage such disclosure; however, it is unfortunately rare.

38. Related party disclosure is an area still needing improvement. Overall, the Commission has not seen any significant improvement in this area from previous reviews.

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

40. The Commission continues to find errors in key management personnel compensation disclosures. Common errors in these disclosures are the omission of share-based payments and directors’ fees (executive or otherwise). In Cycle 10 we wrote to three issuers in respect of such errors.

41. We recently came across an example of an issuer that had disclosed the names of its key management personnel. While NZ IAS 24 does not require this, the Commission encourages such disclosure as good practice as it gives users information about who the issuer considered to be its key management personnel. Such information would be even more useful if the categories and/or positions of key management personnel were also disclosed: for example, a disclosure that the entity considers all directors, the financial controller and the chief operating officer to be key management personnel.

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

43. In Cycle 10 we wrote to two issuers who failed to disclose the terms of transactions with related parties and to another who did not disclose information such as interest rates and repayment terms.

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

45. In Cycle 10 the Commission wrote to two issuers about valuation of their property, plant and equipment. NZ IAS 16 Property, plant and equipment (paragraph 77(c)) requires that, where items of property, plant and equipment are stated at revalued amounts, entities must disclose “the methods and significant assumptions applied in estimating the items’ fair values”.

46. Several entities provided only a general description of the methods and significant assumptions applied. We consider this fails to comply with NZ IAS 16 (paragraph 77(c)). Similar to the requirement to disclose specific assumptions in the impairment and valuation areas, specific significant assumptions must also be disclosed

in the valuation of property, plant and equipment to allow users to determine whether the resulting valuation is realistic and has been reliably determined.

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

48. Investors are entitled to know where expenditure is being incurred. Therefore NZ IAS 1

Presentation of financial statements (paragraph 97) requires entities to disclose material items of income and expenses separately. In meeting this requirement entities should consider both the nature and amount of the income or expense.

49. We wrote to five issuers about their expenses disclosures. In each case the issuer had disclosed a significant of amount of “other expenses” or equivalent line item without further explanation in the financial statements’ notes. These amounts were between

50. The Commission considers non-disclosure of material items of expenses may indicate these entities are still taking a “tick the box” approach to disclosure. Rather than rolling forward their previous year’s financial statements, entities should review their expense disclosures each year to ensure all material expenses, both in nature and amount, are separately disclosed.

51. In addition to disclosure of external audit fees, NZ IAS 1 requires entities to disclose amounts paid to external auditors for assurance-related services, tax services and other services. Entities must also describe the nature of the services provided in each of these categories (NZ IAS 1, paragraph NZ105.1).

52. We identified four entities that had failed to disclose the nature of non-audit services received from their auditors. We note that, while entities usually disclose fees paid by the required categories, some do not describe the nature of those services.

53. Under NZ IAS 28 Investments in Associates requires, with limited exceptions, that investments in associates are accounted for using the equity method. An “associate” is defined as:

“An entity... over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture.”

54. We remind issuers that significant influence only requires an entity to have the power to participate in the financial and operating decisions of the investee. In addition, NZ IAS 28 presumes that if an investor holds more than 20% it has a significant influence unless it can be clearly demonstrated this is not so (paragraph 6). Moreover, paragraph 37(d) requires disclosure of the reasons for assuming an investor does not have significant influence if, directly or indirectly through subsidiaries, it holds 20% or more of the voting or potential voting power of the investee.

55. The Commission wrote to one issuer about its accounting for a significant investment.

The issuer held an equity investment in the other entity larger than 20% of the other’s voting shares as well as having an appointee on the entity’s board of directors. It had failed, however, to account for the entity as an associate.

56. Seven of the 20 entities reviewed (35%) failed to include an explicit and unreserved statement of compliance with IFRS in their financial statements as required by NZ IAS 1.

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

(a) 3 issuers about substantial security-holder information under section 35F of the

(b) 3 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’ obligations under section 19U of the Securities Markets Act; and

³This matter was discussed in detail in the Commission’s public report for Cycle Seven of the Financial Reporting Surveillance Programme which can be obtained at http://www.seccom.govt.nz/downloads/review- financial-reporting-cycle7.pdf

60. The Commission considers those preparing financial reports and their auditors must make more effort to comply and thereby deliver the greater transparency NZ IFRS demands.

61. Mary Shapiro, the Chairman of the United States Securities and Exchange Commission said recently:

“We should never underestimate or take for granted the wide spectrum of benefits that come from transparency. In particular transparency plays a vital role in promoting public confidence in the honesty and integrity of financial markets.”⁴

62. Disclosures are a particularly important aspect of transparency where significant judgements and estimates have been made in deriving their amounts.

63. We remind directors of issuers that ensuring financial statements meet applicable standards is one of their fundamental duties. In failing to do so directors could be failing in their duty to inform investors regarding their business activities. Directors should thoroughly review financial statements to ensure they fairly reflect the entity’s financial position and performance. Where directors believe information to be obscure or unrepresentative of the entity’s operations, they must provide additional disclosures. In today’s volatile economic conditions, rolling forward the previous years’ financial statements is unacceptable.

64. The Commission will continue reviewing issuers’ financial reporting as part of its

65. We will also follow up and review the next annual reports of those issuers who agreed to make changes to ensure matters raised have been taken into account.

66. The Commission will take appropriate steps to encourage and ensure compliance with

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 issuers⁵to be fundamental to the fairness, efficiency and transparency of New Zealand’s securities markets.

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

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

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

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

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

(a) In relation to an equity security or debt security, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to an equity security or a debt security, or to a trust deed that relates to a debt security, the person on whose behalf any money paid in consideration of the allotment of the security is 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:

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

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

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

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

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

7. The Financial Reporting Act 1993 requires issuers to prepare financial statements that comply with New Zealand Generally Accepted Accounting Practice (NZ GAAP) and provide a true and fair view of the matters to which they relate⁶.

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

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

9. The Financial Reporting Act defines “applicable financial reporting standard” to mean an approved financial reporting standard that applies to a reporting entity (or group) and to an accounting period (or interim accounting period) in accordance with a determination of the Accounting Standards Review Board (ASRB) for the time being in force or any election made under section 27 of the Financial Reporting Act. All issuers are required to apply NZ IFRS in the preparation of their financial statements for annual accounting periods commencing on or after 1 January 2007.

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

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

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

⁶Part 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

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 that 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

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

15. Issuers trading on the Unlisted⁷exchange and issuers not listed on any exchange may be also included in the cycle reviews.

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

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

18. Matters identified in the review are referred to as matters raised⁸or other matters.

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

⁷Unlisted 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.

⁸Prior to Cycle 6, the Commission referred to matters raised as significant matters.

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

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

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

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

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

25. Auditors have an important role in encouraging companies to comply, not only with the statutory requirements, but also with best practice. The Commission encourages auditors to be vigilant in the audit of financial statements. High-quality external auditing is critical to the integrity of financial reporting and to the efficiency and integrity of the securities markets.

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

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