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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 8

Financial instrument disclosures

70. NZ IFRS contains many detailed requirements for financial instruments. These are contained in NZ IFRS 7 Financial Instruments: Disclosures, NZ IAS 32 Financial Instruments: Presentation and NZ IAS 39 Financial Instruments: Recognition and Measurement.
71. The Commission's 2008 News Releases referred to the need for issuers to assess the appropriateness of the going concern assumption, with particular reference to financial instruments. The Commission highlighted to issuers disclosures relating to maturity profiles and classification of the maturity of debt, liquidity, the classification of financial instruments as current or non-current and triggers for breaches of loan covenants.
72. The Commission wrote to 2 issuers about:
    1. the classification of bank borrowings as non-current liabilities rather than as current liabilities (NZ IAS 1 Presentation of Financial Statements, paragraph 69); and
    2. liquidity risk disclosures (NZ IFRS 7, paragraph 34) including expected maturity analysis (NZ IFRS 7, Appendix E, paragraph 20).
73. The current market conditions may mean that many businesses are regularly updating their financiers about their cash position and some have to renegotiate the terms of their financing arrangements to ensure continued access to longer-term funding. NZ IAS 1 (paragraph 69) requires a liability to be classified as current where an entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. As such the availability of unconditional funding at balance date for a period beyond twelve months will determine whether an issuer's debt can be classified as non-current. To enable an issuer to be certain that it can classify its debt as non-current requires the issuer to be aware of its performance against banking covenants and to ensure that any funding issues are resolved by balance date.
74. It should be noted that the criteria for assessing the classification of debt as current or non-current are new requirements. The issue of classification of debt, and the changed requirements, featured in the Commission's report on Feltex Carpets Limited. Paragraph 123 of that report states:

"NZ IAS 1 paragraph 60⁸ changed, from prior requirements under NZ GAAP, to require that a liability be classified as "current" in the balance sheet when the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date."

75. The Commission obtained assurance from 1 issuer that it would provide additional liquidity risk disclosures that meet the requirements of NZ IFRS 7 in future.
76. In relation to financial institutions, the Commission draws their attention to the New Zealand-specific requirements in Appendix E of NZ IFRS 7. In the absence of sufficient information regarding liquidity risk, financial institutions that manage their liquidity risk on the basis of expected maturity dates are required to provide an analysis of financial instruments on this basis. The disclosure of additional liquidity information at balance date is important to ensure that the financial statements are not false and misleading, particularly when economic conditions have deteriorated.
77. The Commission wrote to 15 issuers about the inadequate disclosure or non-disclosure of the following matters as required by NZ IFRS 7:
    1. the specific assumptions applied when a valuation technique is used to determine fair value, for example, information about the interest rates and discount rates used in calculating the fair value of interest rate swaps (paragraph 27);
    2. for each type of risk arising from financial instruments, summary quantitative data about the exposure to that risk (paragraph 34);
    3. the carrying amounts of financial instruments by each category of financial instrument (paragraph 8);
    4. the maximum credit risk relating to all classes of financial instruments (paragraph 36 (a));
    5. information about the credit quality of financial assets that are neither past due nor impaired (paragraph 36(c));
    6. an analysis of the age of financial assets that are past due as at the reporting date but not impaired (paragraph 37);
    7. a maturity analysis of financial liabilities that shows the remaining contractual maturities (paragraph 39 (a)); and
    8. a sensitivity analysis in relation to interest rate risk (paragraph 40).
78. In most cases, issuers agreed to clarify or make the necessary disclosures in their future financial statements (change agreed).

Related party information and key management personnel compensation

79. The nature of related party transactions necessitates certain disclosures to draw attention to the possibility that the financial performance, financial position and the cash flows of an entity may have been affected or influenced by related party relationships. In this regard the Commission's 2008 News Releases referred to the Commission's interest in key management personnel compensation and the use and disclosure of off-balance sheet arrangements, particularly related party arrangements.
80. The Commission wrote to 8 issuers about inadequate disclosure or non-disclosure of related party information that was required by NZ IAS 24 Related Party Disclosures (paragraph 17). These included:
    1. the nature of the relationship between related companies;
    2. the amounts of outstanding related party balances at balance date;
    3. details of guarantees given by a related party; and
    4. impairment of a related party loan.
81. Seven issuers agreed to clarify or make the necessary disclosures in their next set of financial statements (change agreed). The remaining matter was resolved through the issuer providing additional information to the Commission.
82. The majority of the instances of inadequate disclosure or non-disclosure of related party information in Cycle 8 related to key management personnel information.
83. The Commission wrote to 18 issuers about the disclosure of key management personnel information as required by NZ IAS 24 (paragraph 16). "Key management personnel" is defined in NZ IAS 24 (paragraph 9). The definition includes directors and executives responsible for planning and controlling the entity, whether directly or indirectly, and includes directors (executive or otherwise). Paragraph 16 requires certain information to be disclosed about key management personnel compensation in total and for each of the specified categories.
84. As directors, whether executive or otherwise, fall within the definition of "key management personnel", any compensation paid to directors needs to be taken into account in disclosing both the categories and the total amount of an entity's compensation to key management personnel. This is notwithstanding that directors' fees may be separately disclosed, as required by the Companies Act 1993 (section 211(f) ⁹), elsewhere in the financial statements or annual report. Where issuers do not reclassify directors' fees into the categories specified in NZ IAS 24 (paragraph 16), they need to disclose directors fees as an additional category or include a cross-reference to the appropriate note disclosing directors fees. Directors' fees also need to be included in the total amount of compensation paid to key management personnel as required by paragraph 16.
85. The matters that the Commission wrote to issuers about included:
    1. the non-inclusion of directors' fees as part of key management personnel compensation;
    2. the lack of clarity on whether directors' fees had been included;
    3. the disclosure of directors' fees separately in another note in the financial statements (without any cross-references from the key management personnel compensation note); and
    4. the non-disclosure of key management personnel compensation in the required categories.
86. Other disclosure-related issues raised included:
    1. the non-disclosure of a share-based payment category, for example, the non-disclosure of share options issued to the Chief Operating Officer during the year and the non-inclusion of share-based payments in key management personnel compensation;
    2. the non-disclosure of categories of key management personnel compensation, for example, key management personnel compensation was disclosed as one total category and directors' fees, share options expenses and other key management personnel compensation were separately disclosed elsewhere in the financial statements under different notes without any cross-references from the key management personnel compensation note; and
    3. the selected or incomplete disclosure of key management personnel compensation, for example:
       1. the remuneration of the Chief Financial Officer and the executive team were included but directors' compensation was excluded;
       2. employee benefits and share-based payments were included but directors' fees were excluded; and
       3. where only one category "salaries and other employee benefits" was disclosed and only for "all directors and executives with greatest authority for strategic direction and management of company".
87. Notwithstanding that in many instances related party information was disclosed elsewhere in the financial statements, the Commission considered that the issuers did not fully comply with NZ IAS 24 (paragraph 16).
88. Ten of the issuers written to committed to make better disclosures in their next financial statements (change agreed). The Commission's queries to 6 issuers were resolved through additional information from issuers. The Commission reiterated its view for better disclosure through a second letter to 2 issuers.
89. The Commission considers the continued high incidence of inadequate disclosure or non-disclosure of related party information by issuers to be unsatisfactory, given the effect related party relationships can have on an entity's financial performance, financial position and cash flows.
90. In the current economic conditions, when the financial performances of entities are likely to be poor, there is heightened interest in the compensation paid to directors and executives. Related party information is essential for users to assess the performance of the entity and that of management (and directors) vis-à-vis the entity's performance.
91. The Commission considers that inadequate or non-disclosure of related party information in an issuer's financial statements may also put the issuer at risk when conditions subsequently deteriorate. Non-disclosure or the lack of transparency of related party transactions may render the transactions questionable notwithstanding that there may be nothing untoward at the time the transactions took place.
92. To this extent the Commission considers that there needs to be improvement in disclosing transactions with related parties. Such disclosures should contain sufficient information and be meaningful to enable users to gain an understanding of the potential effect of those transactions and whether they are carried out at arm's length.

Footnotes

8. Paragraph 60 is now paragraph 69 in NZ IAS 1.
9. This section requires a company to state (in the annual report) in respect of each director or former director of the company the total remuneration and other benefits received by the director or former director from the company during the accounting period.