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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 6
CYCLE 6: AN OVERVIEW
Scope
29.
In Cycle 6, the Commission reviewed the financial reports of 30 issuers (including 4 overseas listed issuers) with balance dates from 31 December 2006 to 30 April 2007.
30.
The selection of 30 issuers was made up of:
(a)
15 issuers listed on the New Zealand Stock Market (NZSX) or the New Zealand Debt Market (NZDX) (including 4 overseas listed issuers);
(b)
7 issuers listed on the New Zealand Alternative Market (NZAX);
(c)
3 issuers whose shares are traded on Unlisted; and
(d)
5 issuers who are not listed on any exchange.
31.
In this Cycle, 7 NZ IFRS financial statements (including those of 5 first-time adopters), 1 UK GAAP and 3 IFRS as adopted by the European Union financial statements were reviewed. The 19 issuers who prepared their financial statement in accordance with previous NZ GAAP will produce their first set of NZ IFRS financial statements in their next financial year.
32.
All the findings of this Cycle, including those for financial statements prepared in accordance with previous NZ GAAP, are discussed in the context of NZ IFRS to provide feedback to issuers yet to transition to NZ IFRS.
Overall comments
33.
Twenty of the 30 reports reviewed had matters that prompted the Commission to write to the respective issuers. This included all five of the first-time adopters of NZ IFRS reviewed in Cycle 6.
34.
Numerically there was a higher incidence of matters raised in this Cycle compared with previous Cycles. However, on reviewing the findings, the Commission does not believe that this higher incidence is symptomatic of poorer accounting given the nature of the findings. Generally, issuers' compliance with NZ GAAP is good and the Commission continues to be encouraged by the commitment of issuers and their auditors to comply with NZ GAAP and to provide a true and fair view of the state of affairs of those issuers.
35.
The Commission reiterates that issuers can ensure errors are minimised by:
(a)
consulting with their audit committee during the preparation and finalisation of the financial statements; and
(b)
incorporating a thorough quality review process when finalising the financial statements.
36.
Issuers should review their compliance with statutory requirements as a critical step in the preparation and finalisation of an annual report.
Outcome of matters raised
37.
Table 1 shows the outcome of matters raised in letters to issuers in Cycle 6.
Table 1: Outcome of matters raised in letters to issuers
| Notes | Outcome | Matters raised | % |
|---|---|---|---|
| (1) | Resolved | 11 | |
| (2) | Point taken/change agreed | 23 | |
| Agreement reached | 34 | 92% | |
| (3) | Second letter sent | 2 | |
| (4) | Other follow-up action | 1 | |
| 3 | 8% | ||
| Total matters raised | 37 | ||
Notes to the Table
(1)
Resolved: a satisfactory explanation was provided by the issuer on the matters raised.
(2)
Point taken / change agreed: the issuer has acknowledged the point made / agreed to make changes in subsequent financial statements.
(3)
Second letter sent: a second letter closed the matter but reiterated the points made.
(4)
Other follow-up action: more action required, e.g. the need for subsequent correspondence to seek answers to follow-up questions.
38.
Although some responses from issuers explained and resolved a matter the Commission notes that the original question may well not have been raised had the issuer's disclosure been clearer or more transparent. The Commission encourages issuers to ensure that all of their disclosures are sufficiently clear to explain adequately matters included in their financial reports.
39.
The other follow up action in the table above is the incorrect accounting for a reverse acquisition under previous NZ GAAP. The Commission has decided to refer this matter raised to NZICA (for further details refer to paragraphs 77 to 80).
Referral to NZX
40.
The Commission has referred one issuer to the NZX for failing to include material information in an annual report (for further details refer to paragraphs 146 to 148).
Moving to NZ IFRS
41.
In New Zealand, all issuers (other than dual and overseas listed issuers) are required to apply NZ IFRS in the preparation of their financial statements for periods commencing on or after 1 January 2007.
42.
The Commission is encouraged by the fact that most issuers who have adopted NZ IFRS for the first time in this Cycle have adequately disclosed the effect of the transition from previous NZ GAAP to NZ IFRS.
43.
In Cycle 6 we queried two issuers with regard to their disclosure about the effect of transition to NZ IFRS:
(a)
The first is a case where the issuer incorrectly accounted for a reverse acquisition in an earlier year when reporting under previous NZ GAAP. The correction of that prior period error in the subsequent year was incorrectly included as an NZ IFRS transition adjustment. This issue is discussed further in paragraphs 77 to 80. The Commission has decided to refer members involved in the preparation and audit of this issuer to NZICA.
(b)
The other case is where the issuer did not adequately explain how the transition from previous NZ GAAP to NZ IFRS resulted in a change to the timing of revenue recognition. The Commission considers that in this case, the disclosures could have provided greater detail.
44.
Issuers should be aware that NZ IFRS 1 (paragraph 40) requires the disclosure of "sufficient detail" to enable users to understand the material adjustments to the income statement.
45.
Issuers moving to NZ IFRS in their next financial statements will find that NZ IFRS generally requires more disclosures than previous NZ GAAP. The process of preparing and finalising financial statements must be thorough to ensure all NZ IFRS requirements are met.