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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 6
Getting the "basics" right
46.
In the preparation of financial statements, both in accordance with previous NZ GAAP and NZ IFRS, it is important that issuers get the "basics" right. This means, for financial statements prepared in accordance with NZ IFRS, providing all the disclosures required by NZ IFRS 1, NZ IAS 1 Presentation of Financial Statements and NZ IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
47.
For financial statements prepared in accordance with previous NZ GAAP, this means providing all the disclosures required by FRS-1: Disclosure of Accounting Policies, FRS-2: Presentation of Financial Reports and FRS-9: Information to be Disclosed in Financial Statements.
48.
Many of the disclosures required by the above Standards could be viewed as forming the "basic" building blocks of an issuer's financial report. It is important for this information to be disclosed.
49.
In the review of financial statements prepared in accordance with NZ IFRS, two issuers failed to disclose both:
(a)
the key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date (NZ IAS 1 (paragraphs 116)); and
(b)
the level of rounding used in presenting amounts in the financial statements as required by (NZ IAS 1 (paragraphs 46(e))).
50.
Preparers should note that the disclosure of key sources of estimation uncertainty was not a requirement under previous NZ GAAP and is a new requirement under NZ IFRS.
51.
In the review of financial statements prepared in accordance with previous NZ GAAP, two issuers restated certain comparatives explaining that the reclassification was to reflect current year classifications but without explaining the nature of the reclassification as required by FRS-2 (paragraph 5.15).
52.
The Commission also wrote to an issuer whose financial statements did not disclose the statutory basis for preparing the financial statements as required by FRS-1 (paragraph 5.5(a)) and separately to another issuer for failing to disclose donations made to a trust as required by FRS-9.
53.
FRS-9 (paragraph 6.13) lists items of expense required to be disclosed separately including donations made. Paragraph 6.14 of FRS-9 states that "in most circumstances the items listed in paragraph 6.13 would, by their nature, be material" and thus require separate disclosure.
54.
The Commission's review of financial statements prepared in accordance with both NZ IFRS and previous NZ GAAP continued to find typographical errors and inconsistencies in the financial statements, four instances in this Cycle, that reflect negatively on the quality of issuers' financial statements:
(a)
historical errors in calculation of goodwill amortisation;
(b)
liquidity of assets incorrectly presented in the Statement of Financial Position;
(c)
comments in the Directors' Statement not reflecting information presented in the financial statements; and
(d)
inconsistencies in the narrative disclosures about the allocation of goodwill.
"Industry practices"
55.
The Commission is concerned that responses from issuers referred to "industry practices" to justify not complying with applicable financial reporting standards.
56.
Issuers need to be aware that NZ IFRSs and FRSs are the primary indicators of NZ GAAP. Where there is an applicable financial reporting standard on a subject matter and the issuer chooses to adopt "industry practices" that do not comply with the relevant applicable accounting standards, its financial statements will be in breach of NZ GAAP.
Reverse acquisitions
57.
The Commission has, in this and the last two Cycle reviews, identified three instances of incorrect accounting for a reverse acquisition under previous NZ GAAP. The Cycle 6 issuer stated that the "practice adopted by the company was in line with that adopted by other entities".
58.
The Commission has agreed that members involved in the preparation and audit of the financial statements of this issuer will be referred to NZICA.
Disclosures about liquidity management
59.
On a matter regarding the disclosure of an entity's management of liquidity, one issuer contested a disclosure matter raised by the Commission stating that "market practice" was to only disclose additional assumptions and basis of those assumptions where the estimated or expected maturity dates approach has been adopted in presenting the liquidity analysis of the entity.
60.
FRS-33: Disclosure of Information by Financial Institutions (paragraph 11.4) states that "whichever method is used to quantify the financial institution's liquidity position, disclosure should be supplemented by a discussion of the effects of the assumptions used and the basis for those assumptions".
61.
There are similar requirements under NZ IFRS. NZ IFRS 7 Financial Instruments: Disclosures (paragraph 39(b)) requires a description of how an entity manages the liquidity risk inherent in the maturity analysis of financial liabilities. In addition, NZ IFRS 7 Guidance on Implementing (IG31) lists some factors that an entity might consider in providing this disclosure.
62.
NZ IFRS 7 (IG 30) states, "if an entity manages liquidity risk on the basis of expected maturity dates, it might disclose a maturity analysis of the expected maturity dates of both financial liabilities and financial assets". To clarify that the expected dates are based on estimates, the entity should "explain how the estimates are determined and the principal reasons for differences from the contractual maturity analysis that is required by paragraph 39(a) of NZ IFRS 7".