REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 3

Miscellaneous matters

78.

Other comments raised for issuers to consider as part of the preparation of future financial statements. They were the need to:

1. provide reasons for an accounting policy change (FRS-1, para. 5.11);
2. either value inventories at lower of cost and net realisable value instead of at cost, or else clearly specify this in the accounting policy (FRS-4, para.5.1);
3. provide adequate disclosure for subsequent events (FRS-5, para. 6.5);
4. ensure that all financial information properly reconciles with a set of financial statements;
5. show the reconciliation of the balance of unamortised development costs at the beginning and end of the period ( FRS-13, para.5.19 (e));
6. review the period of amortisation for intangibles;
7. provide all disclosures in the financial statements for the period which an acquisition has occurred that has resulted in combination of entities or operations (FRS-36, para.6.2);
8. ensure consistency of disclosures relating to the percentage of shareholdings of subsidiaries in different notes of the financial statements; and
9. value a property previously held as an investment but is now intended to be sold, at carrying amount (SSAP-17, para 5.8).

Market Matters: NZX Referrals

79.

Three continuous disclosure regime matters in respect of three issuers were referred to NZX for consideration. The matters were:

1. an inaccurate continuous disclosure notice;
2. a delay in announcing audited results; and
3. a delay in announcing the signing of a major asset purchase contract.

80.

Timely and accurate announcements must be made for the continuous disclosure regime to be effective.

FOLLOW-UP FROM CYCLE 1

81.

Cycle 1 reported that the Commission was monitoring the reports of two issuers that had serious problems.

82.

In one of these matters no further action was taken because any action for breach of the Securities Act 1978 that may have been available would have been outside the limitation period for laying charges.

83.

On the second matter the Commission referred the auditor of the issuer to the New Zealand Institute of Chartered Accountants in the form of a complaint under the Rules of the Institute.

FOLLOW-UP FROM CYCLE 2

84.

At the end of the Cycle 2 Review three matters related to an issuer's prospectus required further investigation. The Commission has worked through these matters with the issuer and concluded that no further action is warranted.

85.

The matters investigated did highlight the need for issuers to exercise greater care in preparing a prospectus. The reasons for the further investigation were:

1. discrepancies between key figures at the beginning of the prospectus and the figures that formed the basis of the cash flow prospective financial information; and
2. incorrect assertions about the level of sales achieved at the end of a particular period.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

86.

Issuers have three years within which they can to choose to switch to NZ IFRS. Issuers have until periods beginning on or after 1 January 2007 to make this change.

87.

As part of its surveillance programme the Commission will review NZ IFRS financial statements of a selection of issuers during this period. The first reviews are underway and are of NZ IFRS financial statements relating to the reporting period ended 31 December 2005.

88.

The aim of these early reviews is to gather information on the early implementation of NZ IFRS and enable the Commission, where appropriate, to provide feedback to later appliers of NZ IFRS. The Commission will seek to maintain an appropriate balance between education and enforcement during the initial adoption of NZ IFRS.

89.

Issuers are reminded of the two Practice Notes that the Commission has published dealing with IFRS policy expectations in respect of prospectuses. These are available on the Commission's website www.seccom.govt.nz:

1. Practice Note No 2/2005: Prospective financial information in offer documents prepared in periods prior to adoption of NZ IFRS in historical financial statements; and
2. Practice Note No 3/2005: Historical financial information in offer documents prepared in accordance with NZ IFRS.

90.

The Commission adopted NZ IFRS for the year ended 30 June 2006. A key lesson from this experience is not to underestimate the work required to assess the NZ IFRS disclosure requirements, including the consequential information requirements to support additional disclosures.

ONGOING REVIEW AND ENFORCEMENT

91.

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 elements of NZ GAAP.