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


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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 4

FINDINGS UNDER PREVIOUS NZ GAAP

68.

The significant matters found from reviewing financial statements prepared using previous NZ GAAP were:

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.

Non-consolidation of controlled entities

69.: The Commission noted one entity had not consolidated a subsidiary that is within the scope of FRS-37: Consolidating Investments in Subsidiaries (FRS-37). The entity acknowledged that consolidation will be required and the controlled entities will be consolidated under NZ IFRS. The Commission is of the view that the controlled entity under NZ IFRS is also a subsidiary under FRS-37 and should have been consolidated under previous NZ GAAP.

Prospective financial information and accounting policies

70.: The Commission noted one entity had prepared prospective financial information for inclusion in a prospectus using an acquisition method that is prohibited by FRS-36: Accounting for Acquisitions Resulting in Combination of Entities or Operations.
71.: The Commission reminds issuers who include prospective financial information in prospectuses that prospective financial statements should be prepared in accordance with the accounting policies expected to be used in the future for reporting historical general purpose financial statements. This requirement is set out in FRS-42: Prospective Financial Statements (FRS-42). FRS-42 was issued in December 2005 and supersedes FRS-29: Prospective Financial Information.

Omission of disclosures required by FRS-41

72.

The Commission analysed the FRS-41: Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards (FRS-41) disclosures for Cycle 4 issuers that were required to make these disclosures. Only one issuer had overlooked this disclosure in their financial statements. All other issuers have made some form of disclosure about their transition to adopt NZ IFRS, some more informative than others.

73.

The percentage of issuers under review that either did not disclose any information about adoption of NZ IFRS or made disclosures that only partially complied with FRS-41 had improved (30% in Cycle 4 compared to 54% in Cycle 3).

74.

Some disclosures about progress with the transition to NZ IFRS did not include an explanation of how the transition to NZ IFRS is being managed, for example, a description of an entity's plans and progress with its transition project.

75.

Given that the date of transition to NZ IFRS is imminent, it is surprising to note the number of entities that have not yet identified the impact of adopting NZ IFRS or not yet undertaken any formal exercise to identify the impact.

76.

These disclosures are very important as they provide an opportunity for issuers to signal to the market the likely impact of adoption of NZ IFRS and it also enables comparability with other entities who have adopted NZ IFRS. There is an expectation that if an issuer has some NZ IFRS numbers, the issuer should disclose them. FRS-41 requires known or reliably estimable information about the impact to be disclosed. FRS-41 states that reliable estimation is impracticable when it cannot be performed after making every reasonable effort to do so.

77.

The Commission reminds issuers that they have to ensure that any disclosure statement made to comply with FRS-41 should meet the objectives set out in the Standard.

78.

The objective of FRS-41 is to require issuers to disclose the impacts of adopting NZ IFRS including:

(a): information in respect of planning for the transition to NZ IFRS;
(b): key differences in accounting policies expected to arise on adoption of NZ IFRS; and
(c): known or reliably estimable information about the impacts on the financial reports had the financial reports been prepared using NZ IFRS.

79.

FRS-41 also requires that, if the key differences in accounting policies that are expected to arise from adopting NZ IFRS or their quantitative information is not known, a statement to that effect should be made. A few entities had overlooked this disclosure.

80.

Disclosures about the impact of adopting NZ IFRS should be included and form part of the financial statements, regardless of whether this information is also disclosed elsewhere in the annual report.

Lack of explanation of actual versus prospective financial information variances

81.

The lack of explanation of actual versus prospective financial information variances has been a recurring issue over the financial reporting surveillance reviews.

82.

In Cycle 4, the Commission noted one entity included a comparison of actual or prospective financial information, but did not explain the major variances between prospective financial information and the actual results that had been disclosed as required by FRS-9 Information to be Disclosed in Financial Statements paragraph 5.4.

83.

FRS-9 states:

5.4: Where an entity has published prospective financial information other than prospective financial information expressed solely in general terms, for the period of the financial report, the entity shall present a comparison of the prospective financial information previously published with the actual financial results being reported. Explanations for major variations shall be given.

84.

The actual versus prospective financial information comparison disclosure requirement is important to give investors feedback on the relative reliability of prospective financial information, including reasons for variances which are subject to audit. This disclosure is not optional.

Minor Matters

85.

The Commission writes to issuers whose reporting raises matters of significance. When the Commission writes to these issuers it also includes details of other minor matters that it found.

86.

Minor matters identified and raised with issuers applying previous NZ GAAP are:

FRS-3: Property, Plant and Equipment

non-disclosure of the bases and any significant assumptions or limiting conditions of the valuation;

FRS-9: Information to be Disclosed in the Financial Statements

very high percentage of operating revenue was not explained and omitted from analysis in the Notes;
retained profits brought forward and dividend paid was presented in the Statement of Financial Performance following net surplus after taxation.

SSAP-22: Related Party Disclosures

a lack of detail about the identity of the related parties for which there have been transactions;
a lack of disclosure about the terms of settlement of related party balances;
a lack of disclosure about balances outstanding at balance date.

FRS-30: Reporting Share Ownership Arrangements including Employee Share Ownership Plans (ESOP)

a lack of disclosure of those entitled to participate in the ESOP;
a lack of disclosure of the mechanism establishing the price at which shares are allocated.

FRS-31: Disclosure of Information about Financial Instruments

a lack of disclosure concerning credit risk;
a lack of disclosure concerning fair values.

FRS-33: Disclosure of Information by Financial Institutions

a lack of disclosure about impaired assets and provisions; and
a lack of disclosure concerning credit exposure.

87.

The Commission is pleased that many issuers acknowledged the comments that the Commission made and have resolved to address particular matters in their subsequent annual reports.

88.

The nature of many of the matters raised with issuers indicates that issuers should pay greater attention to detail in complying with financial reporting disclosures (e.g. disclosures in respect of significant accounting policies, financial instruments, employee share ownership plans and related party disclosures). Issuers should also make sure that the financial statements provide a true and fair view.

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