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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 7

EXECUTIVE SUMMARY

The Securities Commission of New Zealand has completed Cycle 7 of its Financial Reporting Surveillance Programme (FRSP). This report presents our findings on Cycle 7 and provides an overview of all our work over the seven Cycles.

The Commission is pleased with the overall quality of financial reporting in New Zealand and with the cooperation from issuers and auditors over the last seven Cycles.

A massive effort has been undertaken by various market participants in the last few years to ensure that New Zealand has a set of globally accepted New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS).

To reap the maximum benefit from NZ IFRS adoption the Commission is keen to ensure that NZ IFRS is rigorously applied by issuers. Financial statements of issuers must contain high quality, transparent and comparable information. Issuers must be committed to transparency in their financial reporting. If disclosures beg a further question, the Commission considers that transparency has not been achieved.

The Commission urges issuers to:

• comply with the "basics" of NZ IFRS;
• avoid "boiler-plate" accounting policies and notes; and
• review any "common industry practice" adopted to ensure that it also complies with NZ GAAP.

The Commission encourages issuers to focus on new requirements under NZ IFRS, in particular those relating to:

• valuation and impairment;
• intangible assets (including goodwill and cash generating units);
• classification of financial instruments (as debt or equity); and
• classification of debt (as current or non-current).

Financial Reporting Surveillance Programme

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

Cycle 7 represents the conclusion of the Commission's first round of its FRSP which began in 2005. At the conclusion of Cycle 7, all NZX Limited (NZX) listed issuers, other than some dual or overseas listed entities, have been reviewed at least once. The next Cycle will begin the next round where listed issuers will be selected again for review. Given the requirement for issuers to adopt NZ IFRS, the second round will focus on issuers' compliance with NZ IFRS.

Findings from Cycle 7

In Cycle 7 the Commission reviewed the financial statements of 44 issuers with balance dates from 31 December 2006 to 30 September 2007. Eighteen of the 44 issuers were finance companies. The Commission also reviewed the interim financial statements of five of those finance companies to assess their compliance with, in particular, NZ IFRS 7 Financial Instruments: Disclosures.

Overall, the quality of financial reporting by issuers was good: the Commission did not have cause to write to 27 of the 44 issuers reviewed.

The Commission wrote to 17 of the 44 issuers reviewed. It raised matters mainly about inadequate disclosures relating to:

• related party information;
• financial institutions and financial instruments information;
• essential disclosures including:
  • accounting policies;
  • judgements and estimates;
  • material components of "other expenses"; and
  • statement of compliance with IFRS.

The Commission notes that many of the matters identified in Cycle 7 are similar to those identified in previous Cycles. The matters are reiterated in this report as the Commission considers them to be important.

In Cycle 7 the Commission also:

• wrote to five issuers on matters relating to the disclosure of information about directors' interests or directors' trading in the securities of the issuer and substantial security holder information;
• wrote to two substantial security holders about their obligations under the Securities Markets Act 1988;
• referred an audit firm to the New Zealand Institute of Chartered Accountants (NZICA) in relation to whether fee dependency posed a possible threat to the audit firm's independence; and
• wrote to two audit firms about the non-disclosure in their audit reports of other services provided to issuers.

The Commission is also considering matters raised in respect of two issuers reviewed as part of its enforcement work on finance companies. No other enforcement action was undertaken in relation to the issuers reviewed in Cycle 7.

Twenty-five percent of all matters written to issuers about in Cycle 7 were resolved through further information and clarification. In 67% of those cases issuers agreed to revise or enhance disclosures in their future financial statements. In 8% of cases a second letter or subsequent correspondence was entered into with issuers to close the matters off by reiterating the Commission's comments. In relation to those matters raised and closed off through a second letter, the Commission will review the issuers' accounting treatment or disclosure in the next round.

Cycle 7 compared to previous Cycles

Over the 7 Cycles the Commission reviewed a total of 285 issuers, an average of 41 issuers in each Cycle (44 issuers in Cycle 7).

In Cycles 1 to 3 the financial statements of all issuers reviewed were prepared in accordance with previous New Zealand Generally Accepted Accounting Practice (previous NZ GAAP). Since Cycle 4 the financial statements of a total of 49 issuers reviewed were prepared in accordance with NZ IFRS (21 issuers in Cycle 7).

The Commission wrote to 126 issuers over the seven Cycles, an average of 18 issuers in each Cycle (17 issuers in Cycle 7). The number of matters raised, including market matters, totalled 185, an average of 26 in each Cycle (29 in Cycle 7). The number of other matters was 296, an average of 42 in each Cycle (54 in Cycle 7).

The Commission is satisfied with the level of agreement reached with issuers over all seven Cycles. Over those Cycles agreement was reached on 89 % of all matters written to issuers after further explanation or clarification (resolved) or commitment from issuers to incorporate the matters or improve their subsequent financial statements (change agreed). In the other 11% of matters, a second letter or other follow-up was necessary. Some of these matters were subsequently resolved. In other cases referrals were made to NZICA.

Concluding comments

The Commission considers that the high percentage of the matters that were settled with issuers over the past seven Cycles bodes well for the future of high quality financial reporting in New Zealand. The Commission is particularly gratified by the many positive comments from issuers and audit firms on our Cycle reviews.

As the deadline for issuers to apply NZ IFRS approached the FRSP and the Cycle reports have focused on NZ IFRS matters to provide feedback and information to issuers who have just transitioned to, or are transitioning to, NZ IFRS.

Applying NZ IFRS may be challenging for many issuers. The Commission believes it assists issuers to raise the standard of financial reporting through the educative approach of its FRSP. However the Commission will not hesitate to take enforcement action where necessary.