REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 3

Significant Matters

30.

The significant matters found were:

1. omission of disclosures required by FRS-41: Disclosing the Impact of Adopting New Zealand Equivalent to International Financial Reporting Standards;
2. parent financial statements materially incorrect;
3. retention of a provision where no present obligation existed;
4. classification of convertible instruments insufficiently clear;
5. non-disclosure of an actual versus prospective financial information comparison;
6. lack of a total recognised revenues and expenses line in the Statement of Movements in Equity;
7. failure to date the financial statements; and
8. non-disclosure of a significant future commitment.

31.

The following matters were also raised with issuers:

1. accounting for an unconditional sale of properties; and
2. accounting treatment for recognition of reclaimed lands.

Issuers provided adequate explanations about these.

32.

The nature of many of the matters raised with issuers indicates that issuers should pay greater attention to detail in complying with some of the financial reporting disclosures (e.g. disclosures in respect of financial instruments and related party disclosures).

Omission of disclosures required by FRS-41

33.

Entities have to adopt New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) for reporting periods beginning on or after 1 January 2007 or choose to early adopt for reporting periods beginning on or after 1 January 2005.

34.

Important information on the transition to adoption is required by FRS-41: Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards. FRS-41 applies to annual, half yearly and quarterly reporting periods of issuers that end on or after 30 June 2005.

35.

The Commission has analysed the FRS-41 disclosures for Cycle 3 issuers that were required to make these disclosures.

36.

The Commission acknowledges that a great deal of effort is going into NZ IFRS transition but is disappointed with the level of response to these disclosures in the financial statements examined in Cycle 3.

37.

These disclosures are very important as they provide an opportunity for issuers to signal to the market as to the likely impact of adoption of NZ IFRS.

38.

The annual reports of the 45 Cycle 3 issuers indicate that:

1. 40% of issuers complied fully with FRS-41; and
2. 53% of the issuers either did not disclose any information about adoption of NZ IFRS or made disclosures that only partially complied with FRS-41.

The remaining 7% were issuers to which FRS-41 did not apply because of the timing of their balance dates.

39.

The Commission has written to issuers that did not include this information in this report seeking details about the issuers NZ IFRS conversion process.

40.

Many did not include a cautionary statement that the actual impact of adopting NZ IFRS may vary from the information presented and that the variation may be material. Others did not include explanations of the expected key differences or estimated impacts or, where these were not known, statements to that effect.

41.

Overall, the level of detail of the disclosures was varied:

1. some 46% had detailed and specific disclosures;
2. 16% had a medium amount of mainly general information; and
3. 31% had either minimal or no disclosures.

The remaining 7% were not required to disclose information about the transition to NZ IFRS.

42.

Many provided detailed information on the background to adoption of NZ IFRS. Some disclosed the effects of first time adoption, including the exemptions available on first time adoption of NZ IFRS. Some made no disclosure on this. Issuers who did provide disclosure on adoption of NZ IFRS devoted space to it ranging from three sentences to four A4 pages of information.

43.

There is an expectation that if an issuer has some IFRS numbers, the issuer should disclose them. Also plain English explanations of what the transition to IFRS means to readers is always preferred.

44.

Comments on the various specific FRS-41 requirements:

1. Transition management disclosure
   Forty-seven percent had medium to detailed narrative disclosures about managing the transition to NZ IFRS. They appeared prepared for adoption or had begun considering the process. Many had set up audit, risk or steering committees and engaged outside consultants to oversee, manage or undertake the process. Some issuers disclosed expected changes to systems, business and financial procedures in addition to accounting and reporting policy changes. Most issuers were just starting to evaluate the impact of change, although two issuers started as early as December 2003 and February 2004. Some issuers are well advanced in the evaluation process and two issuers reported their project on transition completed at the date of their 2005 annual reports. Only 23 of the 45 issuers made a positive statement on their expected date of adoption of NZ IFRS.

   About half the issuers made minimal or no disclosure of their transition management. They either had not started the process or were in the early stages of considering the impact. Many had not determined the adoption date, considered the timing of adoption or identified the expected key areas of difference in accounting policies that were likely to arise.

2. Narrative key differences disclosure
   Of the 45 issuers, 80% complied with FRS-41 and included a narrative explanation of the expected key difference in accounting policies, or, if not known, a statement to that effect. Of these, 29 issuers (65%) included narrative disclosures about the expected key difference in accounting policies. Many of these disclosures were good detailed disclosures, some indicating the specific impact on the issuer concerned. Some 13% of the issuers did not comply with the FRS-41 requirements. 28% made no narrative disclosures of the key differences.

   Issuers identified between one and 12 key areas of difference that were considered most likely to impact on their accounting policies based on the NZ IFRS issued to date. The three most commonly identified areas were NZ IAS 39 Financial Instruments - Recognition and Measurement (cited in 31 instances), NZ IAS 12 Income Taxes (cited in 27 instances) and NZ IAS 38 Intangible Assets (cited in 18 instances). Other areas included accounting for business combinations, share-based payments, revenue, first time adoption of NZ IFRS, property, plant and equipment, investment properties, presentation of financial statements, employee benefits, financial instruments presentation, and impairment.

3. Quantified disclosure
   Eighty percent complied with FRS-41 by disclosing known or reliably estimable information about the impacts on the financial report had it been prepared using NZ IFRS, or, if not known, a statement to that effect. Of these, only three issuers provided quantitative information in the form of pro-forma financial statements and/or tables reconciling equity and financial performance under NZ GAAP and NZ IFRS. Many others (18%) provided selected quantitative figures, mainly in the area of goodwill. Some 68% of the issuers reviewed provided no quantitative disclosures, many indicating that the quantitative impacts had not been determined.

4. Cautionary statement disclosure
   Forty-five percent complied with FRS-41 by including a cautionary statement warning users that the actual impact of adopting NZ IFRS may vary from the information presented and that the variation may be material. However, many did include general cautionary statements such as:

   1. the expected impacts disclosed were based on NZ IFRS and interpretations as at the date of the disclosures;
   2. the expected impacts disclosed were not exhaustive; and
   3. that the pronouncements were under continuing review and interpretation both by the standard setters and directors.