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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 1

Share-based Arrangement

30.

One issuer had entered into a share-based arrangement with a distributor of its product.

31.

The arrangement involved a distributor being issued share options if certain targets on product order quantities were met. Although this arrangement had been mentioned in a Continuous Disclosure Notice there was no mention of the arrangement in the issuer's financial report.

32.

When the issuer prepared its financial report there were no New Zealand FRS or SSAP that dealt directly with share-based arrangements. However, other standards would have provided authoritative support for disclosure requirements.

33.

We now have NZ IFRS 2 Share-based Payment, issued November 2004, that deals with the subject of share-based payment. Paragraph 44 says that:

"An entity shall disclose information that enables users of the financial statements to understand the nature and extent of share-based payment arrangements that existed during the period."

34.

Information about share options is relevant to investors and should have been disclosed in the issuer's next statutory financial statements.

Actual Versus Prospective Financial Information Comparison

35.

The Commission considers that the actual versus prospective financial information (PFI) comparison disclosure requirement is important so that investors are given feedback on the relative reliability of prospective financial information, including audited reasons for variances.

36.

We found a number of instances where the financial statements included a comparison of actual and PFI. However, no explanations of major variations between PFI and actual results were disclosed as required by FRS-9 Information to be Disclosed in Financial Statements paragraph 5.4. There were also instances of errors in the labelling of columns of figures.

37.

FRS-9 says:

5.4

Where an entity has published prospective financial information other than prospective financial information expressed solely in general terms, for the period of the financial report, the entity shall present a comparison of the prospective financial information previously published with the actual financial results being reported. Explanations for major variations shall be given.

Format of the Statement of Movements in Equity

38.

The format of the Statement of Movements in Equity (SoME) in many financial reports did not appear to be compliant with NZ GAAP in that they did not disclose a total recognised revenues and expenses (TRRE) line.

39.

The SoME is a primary financial statement. FRS-2 Presentation of Financial Reports paragraph 7.1 indicates that one of the objectives of the SoME is as a measure of comprehensive income. To this end FRS-2 paragraph 7.3(a) requires disclosure of a TRRE line in the SoME. Therefore we would expect this line to be disclosed in a SoME.

40.

Although all of the components making up TRRE are disclosed in the SoME, meaning that a knowledgeable reader could calculate the figure, we believe that it is important that the TRRE figure is also disclosed.

41.

We wrote to issuers where there were multiple figures making up TRRE. However, even for other issuers where TRRE only comprises Net Surplus, best practice would be to disclose a TRRE line in the SoME.

Dating of Information

42.

The Commission encourages issuers to actively manage the final stages of their year end reporting process for finalising the annual report. Some reports indicate that some issuers are not well organised through the final stages of the reporting process. However, most companies do appear to successfully manage this process.

43.

The annual report, comprising the financial report and other statutory disclosures, should be reviewed before being dated and signed by the directors. Auditor sign-off should follow signing of the financial report.

44.

The three issues identified were:

a.

undated financial statements;

b.

differences between dates for signing of the financial statements and/or annual report and the date of the security holder information; and

c.

one unusual difference between the date of the accounts and the audit report where the latter preceded the former.

45.

Although signed by the directors a number of accounts were not dated. Both FRS-5 Events After Balance Date and relevant legislation require the financial statements and annual report be dated and signed by those authorised to do so.

46.

The differences in dates suggest that the sequence of events may need to be better managed by issuers to ensure that directors and auditors are properly reviewing the annual report in terms of their responsibilities.