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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 8

EXECUTIVE SUMMARY

The Securities Commission of New Zealand has completed Cycle 8 of its Financial Reporting Surveillance Programme (FRSP). This report presents our findings on Cycle 8.

The Commission reviewed the annual reports of 40 issuers, with balance dates from 30 September 2007 to 30 June 2008. The financial statements of all the issuers reviewed were prepared under New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS).

The overall quality of financial reporting by issuers under NZ IFRS was satisfactory. The number of matters raised¹ and other matters² identified in Cycle 8 was significantly higher than in previous cycles. This resulted mainly from the many challenges confronting issuers on transition to NZ IFRS, including the more demanding and detailed requirements of NZ IFRS. In some cases, issuers did not appear to embrace the requirements of NZ IFRS in their entirety.

None of the matters identified, and already dealt with, warranted the Commission taking any enforcement action or making any referrals to any other appropriate body.

The Commission wrote to 35 of the 40 issuers mainly about:

• valuation and fair values;
• intangible assets;
• impairment of assets;
• definition and classification of cash flows;
• financial instrument disclosures;
• related party information and key management personnel compensation;
• management judgements and estimates; and
• statement of compliance with IFRS.

In Cycle 8 the Commission also wrote to:

• 12 issuers about substantial security holder information under section 35F of the Securities Markets Act 1988;
• 7 issuers about information on directors' relevant interests or directors' share dealing under sections 148 and 211 of the Companies Act 1993 and to 7 directors about their obligations under section 19T of the Securities Markets Act; and
• 3 audit firms about services, other than audit services, that they had provided to the issuers.

Twenty-eight percent of all matters raised with issuers in Cycle 8 were resolved through further information and clarification. In 63% of matters raised issuers agreed to revise or enhance disclosures in their future financial statements (change agreed). In 5% of the cases the Commission is still in discussion with the issuers (other follow-up action) at the time of writing this report. In 4% of cases a second letter or subsequent correspondence was entered into with issuers to close the matters off by reiterating the Commission's comments.

The Commission is pleased with the high percentage of matters that were settled with issuers. The Commission is also pleased to note that there has been a reduction in instances of "basic" non-compliance (which were routinely raised in previous cycles) in Cycle 8.

Concluding comments

The Commission appreciates that issuers face many challenges in adopting NZ IFRS. However, issuers must comply with the requirements of NZ IFRS. It is unacceptable to merely carry forward information disclosed under previous Generally Accepted Accounting Practices (previous NZ GAAP). Disclosures need to be refreshed each year to reflect the issuer's activities and the economic environment. Financial statements and the annual report are avenues for an issuer to communicate with their investors and the market. This communication needs to be transparent, complete and coherent and include sufficient narrative disclosures to support numbers in the financial statements.

Issuers must take into account current market conditions in accounting for and disclosing their activities and operations. Transactions and the manner in which they are recognised and/or measured may take on a different significance under different market conditions. Greater disclosures may be necessary, for example:

• where assets are measured at fair value, the significant assumptions underlying the valuations need to be disclosed;
• where there is goodwill or other intangible assets, factors supporting their recognised amounts must be provided where there are, for example, adverse changes in revenue, expenses or the issuer's future outlook; and
• where there are financing facilities, their terms and conditions, any refinancing difficulties, liquidity or breaches of banking covenants need to be disclosed, and if necessary the debts reclassified.

The Commission's aim at this early stage of adoption of NZ IFRS is to take an educational approach and encourage compliance with NZ IFRS to prevent unacceptable financial reporting practices from becoming entrenched. Now that the major move to NZ IFRS has been made, issuers must raise the quality of their disclosures and the standard of compliance with NZ IFRS.

Footnotes

1. Matters raised are matters that are important or where further clarification or information is needed (see Appendix 1 for further discussion).
2. Other matters are miscellaneous matters that the Commission considers could be better disclosed (see Appendix 1 for further discussion).