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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 8

Management judgements and estimates

93. NZ IAS 1 (paragraph 122) requires an entity to disclose in the summary of significant accounting policies or other notes the key sources of the judgements, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies that have the most significant effect on the amounts recognised in the financial statements.
94. Separately, NZ IAS 1 (paragraph 125) requires an entity to disclose information about the assumptions an entity makes about the future and other major sources of estimation uncertainty at the end of the accounting period that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities, including their nature and their carrying amounts as at the end of the reporting period.
95. The Commission's 2008 News Releases suggested that issuers focus on disclosing the significant judgements used in the preparation of the financial statements, the key assumptions and the major sources of estimation uncertainty.
96. The Commission wrote to 4 issuers in relation to the disclosure requirements of NZ IAS 1 (paragraphs 122 and 125). The issuers either did not disclose information required under paragraphs 122 and/or 125 or merely included generic disclosures. It was not always clear from their disclosures which accounting policies had the most significant effect on the amounts recognised in the financial statements and what judgements, if any, management had made about those accounting policies. It was also unclear what assumptions, if any, were made by management about the future, what were the major sources of estimation uncertainty at the end of the reporting period, and which assets and liabilities had a significant risk of having their carrying amounts being materially adjusted within the next financial year as a result of those assumptions and estimates.
97. In 2 instances the areas that judgements had been made by management were identified. References were made to notes in the financial statements in 1 instance. However, the necessary information required by paragraphs 122 and 125 was not included in the notes.
98. Three issuers committed to make and/or improve their disclosures in future. One matter was resolved with the issuer providing additional information to the Commission.
99. The Commission also reminds issuers that even though it may be clear to them why particular judgements had been made, whether as a result of "always having been done under previous NZ GAAP and is generally accepted" or "relates to transactions that occurred in a previous period", the paragraphs 122 and 125 disclosures are still required to be made and communicated to users to comply with NZ IAS 1.
100. The disclosure of key judgements and information about assumptions and sources of estimation uncertainty are important new requirements. The Commission suggests that issuers consider these requirements carefully. The information about management judgements underlying accounting policies (paragraph 122) needs to be differentiated from the assumptions management makes about the future and other major sources of estimation uncertainty (paragraph 125). The information required by these two paragraphs also needs to be differentiated from accounting policies for those transactions. The Commission accepts that some of the paragraphs 122 and 125 information may overlap with information contained in the notes (especially where the information is also required to be disclosed under other Standards). Issuers must exercise judgement in determining what additional disclosures are required to comply with paragraphs 122 and 125.
101. The disclosure of judgements and assumptions underlying the accounting policies and accounting estimates is assuming, and will continue to assume, increasing importance. This is because of the move towards principles-based standards and because NZ IFRS increasingly requires qualitative information to be disclosed "through the eyes of management". Management judgements and assumptions underlying the accounting policies and accounting estimates is one aspect of this qualitative information that is essential for understanding the basis of the quantitative financial information that is presented.

Statement of compliance with IFRS

102. The Commission wrote to 18 issuers stating that there needed to be an explicit and unreserved statement of compliance with IFRS in the issuers' financial statements, as required by NZ IAS 1 (paragraph 16).
103. The Commission discussed this matter in detail in its Cycle 7 Report. The Commission's view is that making this statement is relatively easy but will significantly increase the confidence that overseas investors have that New Zealand issuers have adopted an internationally recognised basis of accounting.

Auditors and other services provided by an auditor

104. The Commission wrote to 3 auditors about the disclosure in their respective audit reports that they had no other relationship with the issuers or any of their subsidiaries other than in their capacity as auditor. In 2 cases the issuers' financial statements made the necessary disclosures about the nature of the other relationships and the amounts involved. However, the audit reports omitted the disclosures.
105. In the third case, it was unclear from the financial statements whether certain work carried out by the auditor constituted "other services". The auditor clarified that the work was part of an audit.
106. The Commission drew the auditors' attention to paragraph 25(e) of New Zealand Auditing Standard AS-702 The Audit Report on an Attest Audit. The Standard requires auditors to make a statement as to the existence of any relationship, other than that of auditor, between the auditor and the entity in their audit report.
107. Auditors and issuers must ensure that there is disclosure of all fees paid to the auditors. It is important that there is transparency in the types of services (other than audit services) and the related fees that are paid to an entity's auditor. The provision of other services, particularly where the amounts involved are large in relation to the total fees paid to an auditor, could compromise an auditor's independence in carrying out audit work.
108. The Commission urges auditors to continue to be vigilant in the audit of financial statements. The Commission considers it important for auditors (and other market professionals involved in the process of financial reporting) to do their part in maintaining the quality and transparency of information provided by issuers in their financial statements.

Matters under other Standards

109. Apart from the commonly occurring matters already discussed above, the Commission raised numerous miscellaneous matters with issuers in Cycle 8, either as a matter raised or as an other matter under various NZ IFRS. Most of these matters related to lack of clarity or non-disclosure of information.
110. In most cases, as reflected in the high percentage of change agreed, issuers agreed to amend future financial statements to take into account the matters raised. In other cases the matters were resolved through further information from issuers. Discussion on a matter is continuing with 1 issuer.

Market matters

111. The Commission wrote to:
     1. 12 issuers about inadequate disclosure or non-disclosure of substantial security holder information under section 35F of the Securities Markets Act 1988; and
     2. 7 issuers about inadequate disclosure or non-disclosure of information about 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.
112. No enforcement action was undertaken in relation to market matters raised with issuers or with directors.

Substantial security holder information

113. Section 35F of the Securities Markets Act requires every public issuer¹⁰ that is a company to send a notice to each of its shareholders with or in its annual report (sent under section 209 of the Companies Act) or, in a notice (sent under section 209), stating the following:
     1. the names of all persons who, according to the register kept under section 35C of the Securities Markets Act, are substantial security holders in the public issuer at the record date¹¹ ; and
     2. the number and class of voting securities of the issuer (as per the register) which forms part of each substantial holding in the issuer as at the record date; and
     3. the total number of each class of the issuer's listed voting securities as at the record date.
114. For every other public issuer, the information is to be sent not later than 30 June in each year.
115. The Commission wrote to 12 issuers about substantial security holder information. These related to:
     1. disclosure of the number of voting securities held by a substantial security holder in the annual report being inconsistent with the information included in the notice filed by the substantial security holder with NZX;
     2. non-disclosure of substantial security holder information in the annual report for some of the substantial security holders;
     3. non-disclosure in the annual report of the date of the substantial security information;
     4. non-disclosure in the annual report of the number of voting securities of the issuer in which each substantial security holder has a relevant interest; and
     5. non-disclosure in the annual report of the total number of voting securities in the issuer.
116. Of the 12 issuers written to, 8 confirmed that their annual report contained errors, inconsistencies or omissions of substantial security holder information and committed to better monitor and disclose future information (change agreed).
117. Matters raised with 3 issuers were resolved when the issuers provided the Commission with further information to the Commission's queries. In the first instance, the issuer confirmed that the relevant substantial security holder information had been provided to shareholders through a notice sent under section 209 of the Companies Act rather than through the annual report. In the second and third instances the matters were resolved through the issuers clarifying that the annual report disclosures reflected information contained in the issuers' interests registers at the time. The Commission wrote a second letter to 1 issuer reiterating the disclosure requirements of section 35F of the Securities Markets Act.

Directors' interests and share dealings

118. The Commission wrote to 7 issuers about disclosures of directors' relevant interests and/or share dealings in their annual reports as required by sections 148 and 211 of the Companies Act and sections 19T and 19U of the Securities Markets Act.
119. Section 148 of the Companies Act requires a director of a company to make certain disclosures to the company on the acquisition or disposal of a relevant interest in the shares of the company and ensure that the particulars of such disclosures are entered in the interests register. Section 211 of the Companies Act requires the annual report of a company to state the particulars of the entries in the interests register made during the accounting period.
120. Section 19T of the Securities Markets Act requires directors and officers of public issuers to disclose their relevant interests and dealings in relevant interests in the securities of a public issuer within 5 trading days of:
     1. the listing of the public issuer; or
     2. the person's appointment as a director.
121. Section 19U of the Securities Markets Act also requires the directors' and officers' relevant interests, acquisitions or disposals to be disclosed to the registered exchange on which the public issuer is listed and in the interests register of the issuer.
122. The Commission wrote to the 7 issuers on the following matters:
     1. the non-disclosure of directors' share dealings in the annual report;
     2. the inconsistent disclosure of information about directors' share dealings within different parts of the annual report;
     3. the inconsistent disclosure of information about directors' share dealings between the annual report and notices filed with NZX; and
     4. failure to disclose dealings in relevant interests within 5 trading days to NZX.
123. In all instances the issuers agreed that their annual reports contained the errors that were drawn to their attention. Issuers committed to provide better disclosures in their next annual reports.
124. The Commission wrote to 2 of those issuers about the failure of directors to provide notices within 5 trading days (section 19T of the Securities Markets Act). The Commission asked for the issuers' corporate governance policies on directors' and officers' disclosures and trading. In both instances the issuers confirmed that their directors and officers were aware of their obligations and policies with regard to disclosures and trading and that they took any non-compliance seriously. The issuers committed to improve their company policies and processes in this respect. For these 2 issuers, the Commission also wrote to their directors.
125. The Commission wrote to 7 directors of 3 issuers directly about their obligations under section 19T of the Securities Markets Act. They related to the failure of the directors to lodge directors' relevant interest notices within 5 days of the acquisition or disposal of relevant interests in the issuers. The Commission accepted the further explanations from the directors.
126. Three issuers also advised the Commission that they intend to improve their administrative processes with regard to the filing of the section 19T information by their directors and officers.

Footnotes

10. The Securities Markets Act 1988 (section 2(1)) defines a public issuer to mean:
    1. a person who is a party to a listing agreement with a registered exchange:
    2. a person who was previously a party to a listing agreement with a registered exchange, in respect of any action or event or circumstances to which this Act applied while the person was a party to a listing agreement with a registered exchange.
11. The "record date" is a date stated in the notice that is not earlier than three months before the notice is sent (Securities Markets Act 1988, section 35F (3)).