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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 6
CYCLE 6 SPECIFIC FINDINGS
63.
This section presents the matters raised with issuers in Cycle 6. The findings are presented as follows:
(a)
matters relating to NZ IFRS financial statements;
(b)
matters relating to previous NZ GAAP financial statements; and
(c)
market matters.
Matters relating to NZ IFRS financial statements
Matters raised
64.
The matters raised with issuers include:
(a)
inadequate disclosures relating to goodwill, including disclosures on cash-generating units, recoverable amount and impairment;
(b)
incorrectly presenting a prior period error as a NZ IFRS transition adjustment; and
(c)
incorrect disclosure of earnings per share.
Inadequate disclosures relating to goodwill, including disclosures on cash-generating units, recoverable amount and impairment
65.
The following NZ IAS 36 Impairment of Assets disclosures were not provided by one issuer:
(a)
the carrying amount of goodwill allocation to the unit (paragraph 134 (a));
(b)
the basis on which the recoverable amount has been determined (paragraph 134 (c));
(c)
as the recoverable amount was based on value in use (paragraph 134 (d)(i-v)):
(i)
a description of each key assumption on which management has based its cash flow projections;
(ii)
a description of management's approach to determining the value(s) assigned to each key assumption;
(iii)
the period over which management has projected cash flows;
(iv)
the growth rate used to extrapolate cash flow projections compared with the long-term average growth rate for the products, industries, or country or countries in which the entity operates;
(v)
the discount rate(s) applied to the cash flow projections.
The Commission draws the attention of issuers to the accounting requirements of NZ IAS 36 and, in particular, to the extensive disclosures relating to estimates used to measure recoverable amounts of each significant cash-generating unit containing goodwill or intangible assets with indefinite useful lives (paragraphs 134 to 136)4. Issuers should note that the disclosures are required notwithstanding that there may be no impairment in the carrying amount of goodwill and intangible assets with indefinite useful lives.
67.
The disclosures in paragraphs 134 to 136 of NZ IAS 36 are new disclosures which are not required under previous NZ GAAP.
68.
NZ IAS 36 prescribes procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount. NZ IAS 36 also prescribes requirements relating to the impairment of goodwill and intangible assets with indefinite useful lives. NZ IAS 36 requires the carrying amount of goodwill and intangible assets with indefinite useful lives to be tested for impairment annually (paragraphs 10 and 90).
69.
NZ IAS 36 requires that, in assessing the recoverable amount of goodwill and intangible assets with indefinite useful lives for impairment purposes these assets be allocated to cash-generating units, "the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets" (NZ IAS 36, paragraph 6).
70.
One issuer that recognised impairment failed to disclose the discount rate that had been used to estimate the recoverable amount of a cash-generating unit. The financial statements explained that in relation to the current estimate of the recoverable amount (value in use) of a cash-generating unit that the discount rates used were based on a "weighted average cost of capital" applicable to the issuer. While the method of calculating the discount rate was disclosed by the issuer, specifically the discount rate that had been used was not.
71.
NZ IAS 36 (paragraph 130(g)) requires that for each material impairment loss recognised or reversed, if recoverable amount is value in use, the discount rate(s) used in the current estimate and the previous period (if any) should be disclosed.
72.
In the financial statements of another issuer where the carrying value of a 50% owned subsidiary was reduced by writing down the goodwill on acquisition, details relating to the impairment were not disclosed in the financial statements (even though those details were explained in the Chief Executive's Report). NZ IAS 36 requires an entity to disclose details about impairment in the financial statements.
73.
While the issuer provided certain impairment disclosures albeit not in the financial statements the following NZ IAS 36 disclosures were omitted:
(a)
the basis on which the unit's recoverable amount had been determined (ie value in use or fair value less costs to sell) (paragraph 134(c)); and
(b)
the methodology used to determine fair value less costs to sell (paragraph 134(e)).
74.
The financial statements of the same issuer also did not identify the subsidiary as the cash-generating unit for which recoverable amount had been determined. NZ IAS 36 (paragraph 130(d)) requires financial statements to describe the cash-generating unit for which recoverable amount has been determined, e.g. whether it is a production line, a plant, a business operation, a geographical area or a reportable segment.
- Paragraph 134 of NZ IAS 36 requires the disclosures for each cash generating unit (group of units) for which the carrying amount of goodwill or intangible assets with indefinite useful lives allocated to that unit (group of units) is significant in comparison with the entity's total carrying amount of goodwill or intangible assets with indefinite useful lives. back