Feltex Carpets Limited
IPO Prospectus, Financial Reporting and Continuous Disclosure

The changes to the ANZ facility agreement and the 31 December 2005 breaches of banking covenants also raised a question of whether FTX properly classified its debt in its 31 December 2005 half-year financial statements.

In its 31 December 2005 half-year financial statements, FTX classified $116,842 million of its debt to ANZ as "non-current."

NZ IAS 1 paragraph 60 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.

NZ IAS 1, paragraph 3, which refers to the scope of the standard, states that certain parts of NZ IAS 1 do not apply to the structure and content of interim financial statements as they do to annual financial statements.

Ernst & Young put forward an argument as FTX's auditors that FTX did not need to classify its debt in the 31 December 2005 half-year financial statements as it would have to under NZ IAS 1, because the principles for classification of debt contained in NZ IAS 1 did not apply to interim financial statements.

However, NZ IAS 34, paragraph 28, requires an entity to apply the same accounting policies in its interim financial statements as are applied in its annual financial statements.

When NZ IAS 1 paragraphs 60 and 3 are read together, there appears to be no applicable reporting standard regarding the classification of debt for interim financial statements as there is for full-year financial statements. For matters where there is no provision made in an applicable financial reporting standard, a reporting entity must look to accounting policies that are appropriate to the circumstances of the reporting entity and that have authoritative support within the New Zealand accounting profession. NZ IAS 1, paragraph 60 provides appropriate authoritative support for the choice of an accounting policy for classification of debt in interim financial statements.

In the Commission's view, it would be inconceivable to accept that different accounting treatments can apply for interim and full-year financial statements, because such an interpretation would allow for two different classifications for the same debt.

The fact that FTX did not have an unconditional right arises from the changes in the terms of the Fourth Restatement and that ANZ did not give FTX a formal waiver of the breach until May 2006. Prior to May, FTX may have inferred from ANZ's conduct that no action would be taken in consequence of the bank's right. However, after 27 October 2005, ANZ had the power, based on the terms in the Fourth Restatement, to conduct a review and to call the loan due and payable. This meant that FTX did not have an unconditional right to defer settlements of its loans for the twelve months.

The enhanced power given to ANZ in the Fourth Restatement regarding the bank's ability to call the loan due and payable meant that FTX did not have an unconditional right to defer settlement of its debt for twelve months. Without this unconditional right, FTX should have classified its debt as current.

In addition, the breach of banking covenants as at 31 December 2005, as discussed in the previous section, was an event of default. This gave ANZ an additional ground on which it could call the loan immediately due and payable. Under NZ IAS 1, this right on the part of the bank required FTX to classify its debt as current, unless a formal waiver had been delivered by ANZ to FTX no later than 31 December 2005.

The Commission concludes that FTX incorrectly classified its debt as non-current in the 31 December 2005 half-year financial statements, because FTX did not have an unconditional right to defer settlement of its debt for twelve months at 31 December 2005 and FTX was in breach of its banking covenants. We view FTX's incorrect classification of debt as a breach of NZ GAAP, not a breach of an applicable financial reporting standard. Since the debt was not properly classified, the market was uninformed about the status of FTX's debt.

Questions of liability under FRA arise only where there is a breach of an applicable financial reporting standard. Therefore, the Commission will not refer this report to the Registrar of Companies in regard to the debt classification issue.

The Commission is strongly of the view that the classification of debt adopted by FTX in the December 2005 financial statements was incorrect and misleading. The changes brought about by NZ IFRS, required that FTX's debt should have been classified as current. However, it appears that the classification of debt in interim financial statements may not be expressly addressed by an applicable financial reporting standard. As such, the Commission refers this question to the ASRB to consider whether any guidance or other action is necessary.