The Securities Commission is New Zealand's main regulator of investments. Our purpose is to strengthen investor confidence and foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of our securities markets.

The Commission regards financial reporting by issuers¹ to be fundamentally important to the fairness, efficiency and transparency of New Zealand's securities markets.

The Securities Commission is required under section 10(c) of the Securities Act 1978, "to keep under review practices relating to securities, and to comment thereon to any appropriate body".

As part of its work to carry out this function, the Commission established the Financial Reporting Surveillance Programme.

The aim of the Commission's Financial Reporting Surveillance Programme is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

issuers' financial report disclosures are clear and comprehensive;
investors can have confidence in the credibility of financial information provided by issuers; and
high quality financial reporting contributes to the integrity of New Zealand's securities markets.

The Financial Reporting Surveillance Programme involves biannual reviews of selected issuers' financial reports. At the end of each Cycle review the Commission publishes a report on this surveillance work that provides market participants with a summary of the findings. Copies of reports for previous Cycles are available on the Commission's website www.seccom.govt.nz.

Issuers are required under the Financial Reporting Act to prepare financial statements that comply with NZ GAAP and provide a true and fair view of the matters to which they relate².

The financial reports of issuers are reviewed against NZ GAAP. For the purpose of the Financial Reporting Act, financial statements and group financial statements comply with NZ GAAP only if those statements comply with:

(a)

applicable financial reporting standards; and

(b)

in relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that:

(i)

are appropriate to the circumstances of the reporting entity; and

(ii)

have authoritative support within the accounting profession in New Zealand.

The term "applicable financial reporting standard" is defined in the Financial Reporting Act to mean an approved financial reporting standard that applies to that reporting entity (or the group) and to that accounting period in accordance with a determination of the Accounting Standards Review Board (ASRB) for the time being in force or any election made under section 27 of this Act.

In December 2002 the ASRB determined that entities required to comply with NZ GAAP under the Financial Reporting Act would be required to apply New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) in the preparation of their financial statements for periods commencing on or after 1 January 2007, with the option to apply from reporting periods commencing on or after 1 January 2005.

The purpose of the Commission's Cycle reviews is to form a view on:

(a)

the level of compliance with NZ GAAP by issuers in their financial statements prepared under the Financial Reporting Act;

(b)

whether any breaches of NZ GAAP identified in those financial statements are likely to cause the financial statements to not show a true and fair view or are likely to be materially misleading to users in the context of information disclosure (for investment decision-making) as envisaged under the Securities Act and therefore require enforcement action; and

(c)

the overall quality of financial reporting practices by issuers.

The Commission has used the term 'previous NZ GAAP' in this report to mean the basis of accounting that an issuer uses for preparing historical financial information before adopting NZ IFRS. The Commission acknowledges that previous NZ GAAP is still current for issuers that have not yet adopted NZ IFRS.

An issuer is defined by the Securities Act 1978 to mean:

(a)

In relation to an equity security or debt security, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to an equity security or a debt security, or to a trust deed that relates to a debt security, the person on whose behalf any money paid in consideration of the allotment of the security is received:

(b)

In relation to a participatory security, or to an advertisement, investment statement, prospectus, or registered prospectus, or to a deed of participation that relates to a participatory security, the manager:

(c)

In relation to an interest in a contributory mortgage offered by a contributory mortgage broker, or to an advertisement that relates to such an interest, the contributory mortgage broker;

(d)

In relation to a unit in a unit trust, or to an advertisement, investment statement, prospectus or registered prospectus that relates to such a unit, the manager:

(e)

In relation to a life insurance policy, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to a life insurance policy, the life insurance company that is liable under the policy:

(f)

In relation to an interest in a superannuation scheme, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to such an interest, the superannuation trustee of the scheme.

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Part II of the Financial Reporting Act 1993 requires every 'reporting entity' to prepare financial statements that comply with generally accepted accounting practice and to provide any additional information required to ensure those statements are a true and fair view of the matters to which they relate.

Part I defines a reporting entity as :

(a)

An issuer; or

(b)

A company, other than an exempt company; or

(c)

A person that is required by any Act, other than this Act, to comply with this Act as if it were a reporting entity.

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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 6