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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 4

INTRODUCTION

1.

Financial reporting surveillance work is undertaken by securities regulators around the world including those in Australia, Europe, the UK and the US. One of the aims of this type of surveillance work is to ensure that there is a consistent application of accounting principles by issuers of securities in these capital markets. These securities regulators are also members of the International Organisation of Securities Commissions (IOSCO).

2.

IOSCO has recently set up an IFRS database enabling securities regulators to share decisions on the application of IFRS. This database provides a reference source for regulatory decisions. The Commission will contribute IFRS issues to this database.

3.

Information in this database will also be assessed by IOSCO, and where it reveals varying interpretations IOSCO intends referring these to the International Accounting Standards Board (IASB) or the International Financial Reporting Interpretation Committee (IFRIC) for consideration.

4.

In 2005, the Commission established a financial reporting surveillance programme to review financial reporting practices of issuers in New Zealand.

5.

The Commission's published report on surveillance work will provide market participants with the Commission's findings from each review and give some guidance on the Commission's expectations of disclosures by issuers.

Financial Reporting Surveillance Programme

6.

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".

7.

As part of its work to carry out this function the Commission has established the financial reporting surveillance programme.

8.

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

9.

The aim of the Commission's programme is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

a.

issuers' financial report 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 will contribute to the integrity of New Zealand's securities markets.

Cycle 4 Review of Financial Reporting by Issuers

10.

In the fourth Cycle of the programme the Commission reviewed the financial reports of 40 issuers with balance dates from 30 June 2005 to 31 March 2006.

11.

The selection of 40 issuers was made up of:

a.

32 issuers listed on the NZX;

b.

6 issuers listed on the NZAX; and

c.

2 issuers whose shares are traded on Unlisted.

12.

The reports were reviewed against NZ GAAP. For the purpose of the Financial Reporting Act 1993, financial statements and group financial statements comply with 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.

13.

The term "applicable financial reporting standard" is defined in the Financial Reporting Act 1993 to mean an approved financial reporting standard that applies to that reporting entity (or the group) and to that 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 this Act.

14.

The purpose of the Commission's review was 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 1993;

b.

whether any breaches of NZ GAAP identified in those financial statements were likely to cause the financial statements to not show a true and fair view, or were likely to be materially misleading to users in the context of information disclosure (for investment decision-making) as envisaged under the Securities Act 1978 and therefore require enforcement action; and

c.

the overall quality of financial reporting practices by issuers.

15.

Although the main focus of the review was the financial statements, other sections of the annual report and continuous disclosure notices for the period were also considered. These were not comprehensively reviewed, although any obvious issue related to continuous disclosure, directors' and officers' relevant interests' disclosure or substantial security holder disclosure was followed up.

16.

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