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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 9

Related party information and key management personnel compensation

28. The Commission considers that related party disclosure is an area that still needs some improvement.

Key management personnel compensation

29. As with Cycle 8, the majority of instances of inadequate disclosure of related party information in Cycle 9 relate to key management personnel compensation disclosures.
30. NZ IAS 24 Related party disclosures (paragraph 16) requires certain information to be disclosed about key management personnel compensation in total and for each of the specified categories. Common errors in disclosures are:
    1. exclusion of non-executive directors' fees or other compensation;
    2. exclusion of share-based payments made to any key management personnel; and
    3. exclusion of directors' fees from total key management personnel compensation.
31. This matter was discussed in detail in our Cycle 8 public report. However, the Commission wishes to emphasise that key management personnel includes any director of the issuer, whether executive or otherwise (NZ IAS 24, paragraph 9).

Entities that have key management personnel in common

32. NZ IAS 24 (paragraph 17) requires disclosure of the nature, amounts and outstanding balances of any transactions between an entity and its related parties. NZ IAS 24 states that two entities are not necessarily related parties by virtue of having common key management personnel. However, the definition of a related party does capture entities that are controlled, jointly controlled or significantly influenced by a member of the reporting entity's key management personnel (paragraph 9).
33. In Cycle 9 the Commission wrote to a director of an issuer who was also a member of the key management personnel of one of its suppliers. From the entity's interests register disclosures the Commission determined that it was likely that the role of that director with the entity's supplier gave that director significant influence within the supplier. However, the entity had not identified its supplier as a related party or provided details of the transactions between the entities.
34. The Commission reminds issuers that 'significant influence' only requires that the member of key management personnel has the power to participate in the financial and operating decisions of the other entity (NZ IAS 24, paragraph 9). Therefore entities should carefully consider the external roles of its key management personnel in other entities when identifying its related parties.

Impairment of assets

35. The Commission urges issuers to ensure any impairment is recognised on a timely basis and details of impairment testing are fully disclosed.
36. In Cycle 9 the Commission wrote to four issuers with regard to their impairment testing and related disclosures. The Commission was pleased to note that in each of these cases, the issuers were able to demonstrate that impairment testing had been performed. However, there is scope for improvement in the disclosures of impairment testing. This is discussed in more detail below.

Impairment testing for interim reporting

37. NZ IAS 36 Impairment of assets (paragraph 9) requires that entities assess, at the end of each reporting period, whether there is any indication that any non-financial asset may be impaired. Entities also need to assess assets for impairment at the end of each interim reporting period. If any such indication exists, the entity must estimate the recoverable amount of that asset.
38. In relation to one issuer the Commission noted that events had occurred within its interim reporting period that indicated that the carrying value of one of its cash-generating units (CGUs) and associated goodwill could be materially impaired. However, there was no disclosure of the results of any impairment testing performed in the issuer's interim financial statements.
39. The Commission wrote to the issuer to confirm that impairment testing had been performed. We were pleased to note that the issuer had performed impairment testing at a detailed level and used independent advisers to assist in the process.
40. In complying with NZ IAS 34 Interim reporting entities as a minimum must disclose condensed financial statements and selected explanatory notes. While NZ IAS 34 does not specifically require entities to disclose any details of impairment testing performed, entities must disclose any information that is material for an understanding of the interim report.
41. Disclosure of impairment testing provides additional assurance to the users of the financial statements that assets are properly valued. In the current economic climate, the Commission encourages entities to disclose additional information in their interim financial statements of any impairment testing performed.

Disclosure of cash generating units and assumptions

42. Cash-generating units to which goodwill has been allocated must be tested for impairment at least annually, as well as whenever there is an indication that the unit may be impaired (NZ IAS 36, paragraph 90).
43. NZ IAS 36 (paragraph 134) specifies the disclosures required for each CGU for which the carrying amount of goodwill is significant and impairment testing has been performed using a value-in-use calculation. These disclosures include the growth rate used to extrapolate cash flow projections and the discount rate(s) applied to the cash flow projections.
44. The Commission has observed that some entities are not making these disclosures or simply describing these assumptions generically. Unless the goodwill balance is not significant these disclosures must be provided in quantitative form.
45. In addition the Commission noted that one issuer had disclosed that goodwill was allocated to seven CGUs. However, for disclosure purposes the information required by NZ IAS 36 (paragraph 134) had been aggregated into two of the entity's business segments. The Commission notes that the disclosures of paragraph 134 must be provided for each CGU to which the carrying amount of goodwill is significant. Aggregation of CGUs for disclosure purposes reduces the usefulness of the disclosures and is not permitted by NZ IAS 36.

Significant judgements and estimates

46. NZ IAS 1 (paragraph 122) requires entities to disclose the judgments, apart from those involving estimations, that management has made in the process of applying the entity's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
47. NZ IAS 1 (paragraph 125) also requires entities to disclose information about the assumptions made about the future and other sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amount of the assets and liabilities.
48. The disclosures required by NZ IAS 1 (paragraphs 122 and 125) are designed to draw users' attention to the most subjective areas of the financial statements and are therefore of great importance. While NZ IAS 1 does not prescribe the format that these disclosures should take, the disclosures should be in a user-friendly format.
49. The Commission notes that these disclosures are generally not well made by issuers. Issuers should clearly distinguish between judgements management has made in the process of applying the entity's accounting policies and sources of estimation uncertainty. The Commission also notes that elements of some issuers' disclosures are unnecessarily dispersed throughout the financial statements. Preferably this information should be disclosed in the same section of the financial statements. When this is not practical clear cross-references to all relevant information should be disclosed.

Miscellaneous matters

Fair value assumptions relating to investment properties

50. NZ IAS 40 Investment properties (paragraph 75(d)) requires disclosure of the assumptions applied in determining the fair value of investment property. In addition to the five issuers written to in Cycle 8, the Commission wrote to an additional issuer in Cycle 9. The issuer agreed to make additional disclosures in its next financial statements.

Foreign exchange gains and losses

51. The value of the New Zealand dollar has fluctuated considerably in recent times. In order for users to assess the impact of changes in foreign exchange rates on financial performance and financial position, entities should clearly disclose translation gains and losses.
52. NZ IAS 21 The effects of changes in foreign exchange rates requires the disclosure of translation gains or losses recognised in the income statement and in other comprehensive income (paragraph 52). The Commission wrote to one issuer that had not disclosed foreign exchange translation gains or losses despite having significant overseas operations. The issuer agreed to make additional disclosures in their next financial statements.

Statement of compliance with IFRS

53. The Commission is pleased to note that the proportion of issuers failing to include an unreserved statement of compliance with IFRS in their financial statements as required by NZ IAS 1 (paragraph 16) has decreased. The Commission wrote to 4 of the 24 issuers on this matter compared with 18 of the 40 issuers reviewed in Cycle 8.
54. 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.

Description of non audit services provided

55. In addition to disclosure of external audit fees, NZ IAS 1 Presentation of financial statements requires entities to disclose amounts paid to their external auditors for assurance related services, tax services and other services. Entities are also required to describe the nature of the services provided in each of these categories (NZ IAS 1, paragraph NZ105.1).
56. The Commission has observed that while entities usually disclose fees paid by the required categories, some entities do not describe the nature of those services. The additional requirement to describe the nature of the services was not required under previous NZ GAAP.

Market matters

57. The Commission also wrote to:
    1. 1 issuer about substantial security holder information under section 35F of the Securities Markets Act 1988;
    2. 2 issuers about information on directors' and relevant interests or directors' share dealing under sections 148 and 211 of the Companies Act 1993 and/or directors and officers obligations under section 19U of the Securities Markets Act; and
    3. 1 audit firm about services, other than audit services, that they had provided to the issuers.
58. No enforcement action was undertaken in relation to market matters raised with issuers or with directors.