Discussion Documents: REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 4


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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 4

EXECUTIVE SUMMARY

The Commission has established a financial reporting surveillance programme to review financial reporting practices of issuers. The aim is to encourage New Zealand issuers to improve the quality of their financial reporting.

In Cycle 4 the Commission reviewed the financial reports of 40 issuers with balance dates from 30 June 2005 to 31 March 2006. Nine of the 40 issuers had applied New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS). As with previous Cycles, the purpose of the Cycle 4 review was to identify the level of compliance with Financial Reporting Standards and other elements of Generally Accepted Accounting Practice and to assess the overall quality of financial reporting.

This report on the Cycle 4 Review provides market participants with the Commission's findings from this review, and gives some guidance on the Commission's expectations of disclosure by issuers.

Cycle 4 findings were similar to the results of previous Cycles where the Commission noted few serious problems, but thought that a number of issuers should raise the standard of their financial reporting. Findings from issuers applying NZ IFRS are available for the first time since the Commission started the financial reporting surveillance programme in 2005. The Commission considers that the level of compliance with NZ IFRS for the early adopters was generally good. However, the Commission did find a number of common non-disclosures by many of these issuers.

Reports of 17 issuers of the 40 reviewed had matters that needed to be addressed. The Commission wrote to these issuers.

The key issues amongst the significant matters found were:

NZ IFRS

quality of explanation of transition to NZ IFRS;
share-based payment transaction not identified and not disclosed;
the presence of a liability component in a convertible note.

Previous NZ GAAP

non-consolidation of controlled entities;
prospective financial information and accounting policies;
omission of disclosures required by FRS-41; and
lack of explanation of actual versus prospective financial information variances.

The Commission has used the term 'previous NZ GAAP' in this report to mean the basis of accounting that an issuer uses for preparing historical financial information before adopting NZ IFRS. The Commission acknowledges that previous NZ GAAP is still current for issuers that have not yet adopted NZ IFRS.

The Commission has been pleased with the cooperation from issuers and their willingness to improve the quality of their financial reporting.

The review also identified issues relating to non-disclosure of waivers in annual reports. One matter was referred to NZX for their consideration and two other matters were referred to the NZX Discipline Special Division.

The Commission will continue its financial reporting surveillance programme.

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