Financial Reporting Surveillance Programme. Review of Financial Reporting by Issuers Cycle 8 [2009] NZSecCom 2 (31 March 2009)

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EXECUTIVE SUMMARY ..................................................................................................... 2

INTRODUCTION.................................................................................................................... 4

CYCLE 8: FINDINGS............................................................................................................. 4

Scope and issuer selection ................................................................................................... 4

Overall comments on Cycle 8.............................................................................................. 4

Outcome of matters raised ................................................................................................... 5

Specific comments on Cycle 8 findings .............................................................................. 6

Valuation and fair values ................................................................................................... 7

Intangible assets ................................................................................................................. 9

Impairment of assets ........................................................................................................ 11

Definition and classification of cash flows ...................................................................... 12

Financial instrument disclosures...................................................................................... 14

Related party information and key management personnel compensation ..................... 15

Management judgements and estimates........................................................................... 18

Statement of compliance with IFRS ................................................................................ 19

Auditors and other services provided by an auditor ........................................................ 19

Matters under other Standards ......................................................................................... 20

Market matters................................................................................................................... 20

Substantial security holder information ........................................................................... 20

Directors’ interests and share dealings ............................................................................ 21

CONCLUSION ...................................................................................................................... 23

ONGOING REVIEW AND ENFORCEMENT .................................................................. 23

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL REPORTING SURVEILLANCE PROGRAMME .................................... 24

The Commission’s Financial Reporting Surveillance Programme...................................... 24

New Zealand Generally Accepted Accounting Practice...................................................... 25

Selecting issuers ................................................................................................................... 25

Identifying matters and taking action .................................................................................. 26

The Securities Commission of New Zealand has completed Cycle 8 of its Financial Reporting

The Commission reviewed the annual reports of 40 issuers, with balance dates from

30 September 2007 to 30 June 2008. The financial statements of all the issuers reviewed were prepared under New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS).

The overall quality of financial reporting by issuers under NZ IFRS was satisfactory. The number of matters raised¹and other matters²identified in Cycle 8 was significantly higher than in previous cycles. This resulted mainly from the many challenges confronting issuers on transition to NZ IFRS, including the more demanding and detailed requirements of NZ IFRS. In some cases, issuers did not appear to embrace the requirements of NZ IFRS in their entirety.

None of the matters identified, and already dealt with, warranted the Commission taking any enforcement action or making any referrals to any other appropriate body.

• 12 issuers about substantial security holder information under section 35F of the

• 7 issuers about information on directors’ relevant interests or directors’ share dealing under sections 148 and 211 of the Companies Act 1993 and to 7 directors about their obligations under section 19T of the Securities Markets Act; and

• 3 audit firms about services, other than audit services, that they had provided to the issuers.

Twenty-eight percent of all matters raised with issuers in Cycle 8 were resolved through further information and clarification. In 63% of matters raised issuers agreed to revise or enhance disclosures in their future financial statements (change agreed). In 5% of the cases the Commission is still in discussion with the issuers (other follow-up action) at the time of

¹Matters raised are matters that are important or where further clarification or information is needed (see Appendix 1 for further discussion).

²Other matters are miscellaneous matters that the Commission considers could be better disclosed (see Appendix 1 for further discussion).

writing this report. In 4% of cases a second letter or subsequent correspondence was entered into with issuers to close the matters off by reiterating the Commission’s comments.

The Commission is pleased with the high percentage of matters that were settled with issuers. The Commission is also pleased to note that there has been a reduction in instances of “basic” non-compliance (which were routinely raised in previous cycles) in Cycle 8.

The Commission appreciates that issuers face many challenges in adopting NZ IFRS. However, issuers must comply with the requirements of NZ IFRS. It is unacceptable to merely carry forward information disclosed under previous Generally Accepted Accounting Practices (previous NZ GAAP). Disclosures need to be refreshed each year to reflect the issuer’s activities and the economic environment. Financial statements and the annual report are avenues for an issuer to communicate with their investors and the market. This communication needs to be transparent, complete and coherent and include sufficient narrative disclosures to support numbers in the financial statements.

Issuers must take into account current market conditions in accounting for and disclosing their activities and operations. Transactions and the manner in which they are recognised and/or measured may take on a different significance under different market conditions. Greater disclosures may be necessary, for example:

• where assets are measured at fair value, the significant assumptions underlying the valuations need to be disclosed;

• where there is goodwill or other intangible assets, factors supporting their recognised amounts must be provided where there are, for example, adverse changes in revenue, expenses or the issuer’s future outlook; and

• where there are financing facilities, their terms and conditions, any refinancing difficulties, liquidity or breaches of banking covenants need to be disclosed, and if necessary the debts reclassified.

The Commission’s aim at this early stage of adoption of NZ IFRS is to take an educational approach and encourage compliance with NZ IFRS to prevent unacceptable financial reporting practices from becoming entrenched. Now that the major move to NZ IFRS has been made, issuers must raise the quality of their disclosures and the standard of compliance with NZ IFRS.

1. The Securities Commission’s Financial Reporting Surveillance Programme (FRSP) is an ongoing surveillance programme. This report sets out findings from the Commission’s Cycle 8 of its FRSP.

2. Appendix 1 sets out the background to the Commission’s FRSP, including how issuers are selected for review and how matters are dealt with when identified.

3. In Cycle 8 the Commission reviewed the annual reports of 40 issuers with balance dates from 30 September 2007 to 30 June 2008.

(b) 3 issuers listed on both the NZSX and the debt security market (NZDX) of NZX; (c) 9 issuers listed on the alternative market (NZAX) of NZX;

5. In Cycle 8 no overseas or dual listed issuers were selected for review. Similarly, no issuer from the previous cycle was reselected for review. The Commission reviewed two financial institutions.

6. This is the first cycle of review in which all issuers selected applied NZ IFRS in the preparation of their financial statements.

7. The Commission considers that issuers’ compliance with NZ IFRS is satisfactory.

Compared to previous cycles the number of matters raised and other matters in Cycle 8 were significantly higher. This resulted mainly from the many challenges confronting issuers on transition to NZ IFRS.

8. The Commission appreciates that issuers have put much effort into the transition to NZ IFRS. The Commission also recognises NZ IFRS contains many more demanding and detailed requirements. As NZ IFRS is new to many issuers, the Commission took the opportunity to highlight common areas of non-compliance with NZ IFRS or unclear disclosures. This is to ensure that issuers continue to raise the quality of disclosures and the standard of compliance with NZ IFRS.

9. Our level of findings on matters raised suggests that issuers still have some work to do in respect of financial reporting disclosures. Notwithstanding this, investors should be reassured that, of the matters already dealt with, there were no matters raised that the

Commission considered were significant enough to warrant taking enforcement action or making a referral to any other appropriate body.

10. Thirty-five of the 40 issuers’ annual reports reviewed contained matters that prompted the Commission to write to the issuers In writing to the issuers on the 96 matters raised, the Commission also drew the attention of those issuers to 53 other matters.

11. The Commission wrote to 12 issuers on substantial security holder matters, to 7 issuers on directors’ disclosures and to 7 directors about their obligations to lodge notices with the issuer and NZX within 5 days of the acquisition or disposal of relevant interests in the issuers.

12. The Commission wrote to 3 audit firms about services, other than audit services, that they had provided to the issuers.

Notes	Table 1: Outcome of matters raised Outcome	Matters raised ³	%
(1)	Resolved	27
(2)	Point taken/change agreed	60
	*Agreement reached*	87	91%
(3)	Second letter sent	4
(4)	Other follow-up action	5
		9	9%
	Total matters raised	96	100%

(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 or subsequent 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.

14. As in previous cycles, the Commission notes that the responses from issuers explained and clarified many of the matters raised, and the high percentage of agreement reached with issuers based on the initial letter from the Commission is pleasing.

³The matters raised exclude the instances where the Commission had written directly both to the audit firms (3 instances)

15. However, as the Commission has previously stated, in many cases writing to the issuers may well have been unnecessary had the issuers made better disclosures. The Commission reminds issuers to ensure that all disclosures are sufficiently transparent, complete and coherent to explain matters included in their financial statements.

16. The Commission will follow up and review the next annual reports of the issuers to ensure that matters raised with them previously have been taken into account.

17. The Commission, through its news releases at the end of 2008⁴, highlighted to issuers the areas of interest to the Commission in the context of the current economic environment. The Commission is keen to ensure that all relevant aspects of NZ IFRS are understood and considered by issuers in the preparation of their financial statements, particularly in these difficult economic times. Issuers were alerted to the following areas of interest to the Commission:

18. Many of the areas of focus and attention set out in the 2008 News Releases continue to be of interest to the Commission and of relevance in the current economic environment.

19. In discussing the Cycle 8 findings the Commission’s focus is on providing timely feedback and information to issuers in the preparation of their next set of NZ IFRS financial statements⁵.

(d) definition and classification of cash flows; (e) financial instrument disclosures;

(f) related party information and key management personnel compensation; (g) management judgements and estimates;

⁴_{See the Commission’s News Releases dated 4 September
2008 and 11 December 2008.}

⁵In this context, references to standards and legislation in this report refer to the most recent equivalent paragraph or section, notwithstanding that an earlier version of the standard or legislation may have been applicable at the time of writing to the

21. Financial reporting of transactions and events is increasingly moving away from a historical cost basis to a fair value basis, through recognition and by way of increased fair value disclosures. In many cases, this affects not just financial instruments but also the valuation of non-financial assets, for example, intangible assets, investment properties and agricultural assets.

22. Fair values reflect the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties at an arm’s length transaction. Fair values provide users with relevant, up-to-date information about the carrying values of assets and liabilities.

23. The use of fair values has its own challenges, particularly in the current market conditions. During stressed market conditions the valuation of transactions and events becomes more challenging even though it is the time when fair values are most needed to reflect the changed or changing market conditions. Market turmoil emphasises the importance of the reliability of fair value measures.

24. The Commission’s 2008 News Releases referred to the challenges in valuation practices in the current tight credit and illiquid markets and to the need for issuers to disclose valuation methodologies, processes, key assumptions, risks and uncertainties underlying their valuations. In a changing market, it is important that issuers communicate the inputs and assumptions that they have used for their valuations to better explain the numbers in the financial statements.

25. The Commission considers that as a set of financial statements may not always reflect the most up-to-date values for a user at the time the report is read, particularly in a rapidly changing market, it is imperative that financial statements disclose all the necessary information surrounding any valuation. For example, as required by NZ IAS 40 Investment Property, whether the valuations are carried out by an independent valuer, whether fair values are supported by market evidence or other factors (which must be disclosed) and the methods and significant assumptions underlying the valuations. In general, in relation to the valuation of both financial⁶and non-financial assets, entities are required under NZ IFRS to ensure, as far as possible, that market inputs are used.

26. Information about fair value methods and the underlying significant assumptions ensures that users are aware of the basis (and any associated limitations) for the fair value measures. It enables users to make any appropriate adjustments when making their investment decisions. The disclosure of such information is also necessary to meet the general legal requirement for financial statements to show a true and fair view.

27. The following fair value and valuation issues were raised with issuers in relation to investment properties under NZ IAS 40:

(a) the possible non-compliance with the fair value hierarchy in NZ IAS 40 (paragraphs 45 and 46); and

⁶In relation to financial instruments, issuers’ attention is drawn to the IASB’s Staff Summary on Using judgement to measure the fair value of financial instruments when markets are no longer active (published in October 2008).

(b) the non-disclosure of significant assumptions underlying the valuation of investment property (paragraph 75(d)).

28. NZ IAS 40 contains a hierarchy for determining the fair value of investment properties. In particular, paragraph 45 states that the best evidence of fair value of a property is current prices in an active market for property that is similar in all material respects. It is only in the absence of current prices in an active market that alternative means of determining fair value such as discounted cash flows should be used (paragraph 46).

29. The Commission wrote to 3 issuers about the fair value hierarchy. In the financial statements of these issuers, the disclosures were unclear. For example:

(a) the accounting policy of 1 issuer stated that the fair values of its investment properties were based on market values but the notes to the financial statements indicated that primary reliance was placed on the capitalisation and discounted cash flow approaches;

(b) the accounting policy of 1 issuer indicated that valuation was based on “expected net cash flows discounted at a market determined risk adjusted rate” but the notes to the financial statements indicated that the fair values of its investment properties were based on market values; and

(c) different notes in 1 issuer’s financial statements gave conflicting information on whether the fair value was market-based or based on the capitalisation/discounted cash flow method.

30. All 3 issuers confirmed that the valuations were in compliance with the requirements of NZ IAS 40. Market-based inputs were used as far as possible by their independent valuers and the capitalisation/discounted cash flow methods were used because of an absence of an active market for similar property in the same location. In all 3 cases, the issuers agreed to clarify their disclosures in future.

“the methods and significant assumptions applied in determining the fair value of investment property, including a statement whether the determination of fair value was supported by market evidence or was more heavily based on other factors (which the entity shall disclose) because of the nature of the property and lack of comparable market data.”

32. The Commission wrote to 5 issuers on this matter. All 5 issuers disclosed some relevant information outside the financial statements in other parts of the annual report. Notwithstanding this, the Commission considered that information required by NZ IFRS should be included within the financial statements. In this way the information is also subject to audit requirements. Three issuers agreed to include the necessary disclosures in their future financial statements. Discussion on this matter is continuing with 2 issuers.

⁷Issuers should take note that similar requirements are contained in NZ IAS 16 Property, Plant and Equipment

33. It is important in the current economic climate to ensure that information about the valuation methods and their underlying significant assumptions is appropriately disclosed. In 2 instances, the Commission requested copies of valuation reports from the issuers to establish the manner in which the fair values of their respective investments properties were determined.

(a) whether certain properties leased to subsidiary companies should be classified as investment properties in the parent company’s financial statements or as property, plant and equipment; and

(b) whether adjustments to the independent valuation of investment properties complied with the requirement in NZ IAS 40 for such valuations to be independent.

35. The two matters were resolved after further information from the issuers. Intangible assets

36. NZ IAS 38 Intangible Assets prescribes the accounting treatment for intangible assets.

The Standard allows an asset to be separately recognised as an intangible asset only if it meets the identifiability criterion. This requires the asset to:

(a) be separable, that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or

(b) arise from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations (paragraph 12).

37. NZ IAS 38 (paragraph 21) allows an intangible asset to be recognised if, and only if:

(a) it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and

38. The Commission’s 2008 News Releases highlighted the need for disclosures relating to the recoverable amounts of each significant cash-generating unit containing goodwill or intangible assets with indefinite useful lives, impairment of goodwill and factors to support the value of intangible assets.

39. The Commission wrote to 4 issuers about matters relating to recognition, valuation and disclosure of intangible assets and/or goodwill.

40. The Commission wrote to 1 issuer to query the inclusion of certain intangible assets as part of goodwill on the acquisition of a subsidiary in a previous year. The intangible assets were separately identified as part of goodwill in the financial statements. It was unclear from the financial statements why the issuer considered that the intangible assets did not meet the requirements of NZ IAS 38 for separate recognition from goodwill on acquisition. It was also not clear if those intangible assets should have been

separately recognised under NZ IFRS 1 First-time Adoption of New Zealand Equivalents to International Financial Reporting Standards on the issuer’s transition to NZ IFRS.

41. The matter was resolved through the issuer providing additional information confirming that the intangible asset did not meet the identifiability criteria in NZ IAS 38 to warrant its separate recognition: its fair value could not be reliably estimated, it was not capable of being separated from the other business assets and should not have been separately identified within goodwill in the financial statements.

42. The Commission also queried 1 issuer on whether certain costs incurred in the development of the issuer’s product met the general recognition criteria in NZ IAS 38 for capitalisation as an intangible asset in particular, the recognition criteria in NZ IAS

38 (paragraph 57) for internally generated intangible assets arising from development.

“An intangible asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an entity can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.

(d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

(e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset

(f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.”

44. The matter was resolved with the issuer providing information to support and demonstrate that all the recognition criteria and factors listed under paragraphs 12 and

(a) the disclosure, for each class of intangible assets, whether useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates used - paragraph 118 requires such disclosures;

(b) whether research costs had been capitalised - paragraph 54 prohibits such recognition;

(c) whether the capitalised overhead expenditure is directly attributable to preparing the asset for use - paragraph 67 does not allow other general overhead expenditure to be included as a component of the cost of an

internally generated intangible asset unless the expenditure can be directly attributable to preparing the asset for use; and

(d) whether patents, trademarks and licences and intellectual property that were internally generated were correctly accounted for - paragraphs 37 and 63 prohibit the recognition of internally generated brands and similar items unless they constitute trademarks and meet the recognition criteria under NZ IAS 38.

46. In the above cases the issuers were in compliance with the respective requirements of NZ IAS 38 and agreed to clarify their disclosures in future financial statements or agreed to make the necessary disclosures in future (change agreed).

47. NZ IAS 36 Impairment of Assets sets out the requirements for entities to recognise an impairment loss where assets are carried at more than their recoverable amount. It also prescribes the procedures that an entity must apply to ensure that its assets are carried at no more than their recoverable amount.

48. The Commission was interested in determining issuers’ understanding, documentation and disclosure of the triggers for impairment of their assets.

49. The Commission wrote to 4 issuers about the matters relating to the possible impairment of their assets.

50. In relation to 1 issuer the Commission noted that several market events had occurred that could have a possible impact on the issuer and the carrying value of its property, plant and equipment. The Commission wrote to the issuer to query whether the issuer had considered those events as indicators of possible impairment of the issuer’s assets, whether impairment testing of its assets was performed and the specific factors supporting the carrying value of those assets.

51. The matter was resolved through the issuer providing information about the processes and the factors that it had taken into account in carrying out impairment testing, including the engagement of independent valuers for the purpose of valuing the property, plant and equipment.

52. In another case, the Commission queried 1 issuer about the possible impairment of goodwill in the group financial statements given the continuing losses of a subsidiary company. The matter was resolved through the issuer providing independent third party information to support the carrying value of the goodwill.

(a) the possible impairment of goodwill/intangible assets as a result of current market turmoil; and

(b) the basis for determining the recoverable amount of the cash generating unit containing goodwill.

54. In both cases, the issuers provided the necessary information for the matters to be

55. The indicators for impairment are many and varied, with different issuers being affected by different indicators. Issuers’ attention is drawn to the detailed disclosure requirements in NZ IAS 36 (paragraphs 126 to 137). Issuers need to ensure that the necessary impairment indicators, and their underlying assumptions and estimates, are disclosed, particularly where they are sensitive to changes.

56. The Statement of Cash Flows, one of the core financial statements in the financial report of every issuer, helps users assess the ability of the entity to generate cash flows and the needs of the entity to utilise those cash flows. When used in conjunction with the rest of the financial statements, the Statement of Cash Flows enables users to evaluate an issuer’s changes in net assets, its financial structure (including its liquidity and solvency) and its ability to adapt to changing circumstances and opportunities.

57. The Commission’s 2008 News Releases referred to its interest in the definition and classification of cash flows.

58. The Commission wrote to 3 issuers in relation to matters under NZ IAS 7 Statement of Cash Flows. These included:

(a) the possible incorrect classification of cash flows as operating rather than financing; and

(b) issues relating to the definition of cash and cash equivalents which were inconsistent with the definition in NZ IAS 7.

59. NZ IAS 7 requires an entity to present a Statement of Cash Flows which reports cash flows during the period classified by operating, investing and financing activities.

Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

Financing activities are activities that result in changes in the size and composition of the contributed equity and borrowings of the entity.”

61. NZ IAS 7 (paragraph 11) states that an entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business.

62. Paragraph 12 states that a single transaction may include cash flows that are classified differently. For example, when the cash repayment of a loan includes both interest and capital, the interest element may be classified as an operating activity and the capital element is classified as a financing activity.

63. Paragraph 13 states that the amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of financing.

64. Paragraph 14 states that cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. Therefore, they generally result from the transactions and other events that enter into the determination of profit or loss. It states that some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.

65. The Commission wrote to 2 issuers querying whether amounts received from their customers, but which are repayable to the customers, should have been classified as financing cash flows rather than as operating cash flows in the issuers’ Statement of Cash Flows. Both considered the cash flows to be part of their “principal revenue- producing activities” (NZ IAS 7, paragraph 6). The amounts repayable are not recognised as revenue in the issuers’ Statement of Financial Performance but as liabilities in their Statement of Financial Position.

66. The Commission considers that such cash flows should be disclosed as part of an entity’s financing activities. Notwithstanding that paragraph 11 states that an entity presents its cash flows from operating, investing and financing activities in a manner which is most appropriate to its business, in this case, the Commission considers that the classification is not appropriate for the following reasons:

• the cash flows are in the nature of an interest-free loan from the entity’s customers and are repayable to the customers;

• the cash flows are recognised as liabilities in the Statement of Financial Position and result in changes in the size and composition of the borrowings of the entity; and

67. While operating activities are defined and relate to the principal revenue-producing activities of the entity, NZ IAS 7 (paragraph 14), in explaining cash flows from operating activities, focuses on cash flows “derived” from the principal revenue- producing activities of the entity. The examples in paragraph 14 differentiate cash flows “derived” from those activities from the total cash flows generated by those activities. As paragraph 14 goes on to illustrate, some transactions, such as the sale of an item of plant, may give rise to a gain or loss which is included in the determination of profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities. The Commission’s view is that this illustration is analogous in that, while the cash flows from customers may form a close part of the entity’s principal revenue-generating activity, what is derived from those cash flows (and recognised as revenue) are the fees derived from providing services to its customers, not the total gross cash flows from its customers.

68. The Commission wrote to 1 issuer that had included in its Statement of Cash Flows cash and cash equivalents that appeared to be inconsistent with the definition of those terms in NZ IAS 7. NZ IAS 7 (paragraph 6) defines the term “cash and cash equivalents” and paragraph 7 states that an investment normally qualifies as cash equivalent if it has a short maturity of, say, three months or less from the date of acquisition. In this case the issuer included under cash and cash equivalents term deposits with maturities that were longer than three months.

69. The issuer agreed that the investments were misclassified and committed to amend and clarify their disclosures in future financial statements.

70. NZ IFRS contains many detailed requirements for financial instruments. These are contained in NZ IFRS 7 Financial Instruments: Disclosures, NZ IAS 32 Financial Instruments: Presentation and NZ IAS 39 Financial Instruments: Recognition and Measurement.

71. The Commission’s 2008 News Releases referred to the need for issuers to assess the appropriateness of the going concern assumption, with particular reference to financial instruments. The Commission highlighted to issuers disclosures relating to maturity profiles and classification of the maturity of debt, liquidity, the classification of financial instruments as current or non-current and triggers for breaches of loan covenants.

(a) the classification of bank borrowings as non-current liabilities rather than as current liabilities (NZ IAS 1 Presentation of Financial Statements, paragraph

(b) liquidity risk disclosures (NZ IFRS 7, paragraph 34) including expected maturity analysis (NZ IFRS 7, Appendix E, paragraph 20).

73. The current market conditions may mean that many businesses are regularly updating their financiers about their cash position and some have to renegotiate the terms of their financing arrangements to ensure continued access to longer-term funding. NZ IAS 1 (paragraph 69) requires a liability to be classified as current where an entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. As such the availability of unconditional funding at balance date for a period beyond twelve months will determine whether an issuer’s debt can be classified as non-current. To enable an issuer to be certain that it can classify its debt as non-current requires the issuer to be aware of its performance against banking covenants and to ensure that any funding issues are resolved by balance date.

74. It should be noted that the criteria for assessing the classification of debt as current or non-current are new requirements. The issue of classification of debt, and the changed requirements, featured in the Commission’s report on Feltex Carpets Limited. Paragraph 123 of that report states:

“NZ IAS 1 paragraph 60⁸changed, from prior requirements under NZ GAAP, to require that a liability be classified as “current” in the balance sheet when the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.”

75. The Commission obtained assurance from 1 issuer that it would provide additional liquidity risk disclosures that meet the requirements of NZ IFRS 7 in future.

76. In relation to financial institutions, the Commission draws their attention to the New Zealand-specific requirements in Appendix E of NZ IFRS 7. In the absence of sufficient information regarding liquidity risk, financial institutions that manage their liquidity risk on the basis of expected maturity dates are required to provide an analysis of financial instruments on this basis. The disclosure of additional liquidity information at balance date is important to ensure that the financial statements are not false and misleading, particularly when economic conditions have deteriorated.

77. The Commission wrote to 15 issuers about the inadequate disclosure or non- disclosure of the following matters as required by NZ IFRS 7:

(a) the specific assumptions applied when a valuation technique is used to determine fair value, for example, information about the interest rates and discount rates used in calculating the fair value of interest rate swaps (paragraph 27);

(b) for each type of risk arising from financial instruments, summary quantitative data about the exposure to that risk (paragraph 34);

(e) information about the credit quality of financial assets that are neither past due nor impaired (paragraph 36(c));

(f) an analysis of the age of financial assets that are past due as at the reporting date but not impaired (paragraph 37);

(g) a maturity analysis of financial liabilities that shows the remaining contractual maturities (paragraph 39 (a)); and

78. In most cases, issuers agreed to clarify or make the necessary disclosures in their future financial statements (change agreed).

79. The nature of related party transactions necessitates certain disclosures to draw attention to the possibility that the financial performance, financial position and the cash flows of an entity may have been affected or influenced by related party relationships. In this regard the Commission’s 2008 News Releases referred to the Commission’s interest in key management personnel compensation and the use and disclosure of off-balance sheet arrangements, particularly related party arrangements.

80. The Commission wrote to 8 issuers about inadequate disclosure or non-disclosure of related party information that was required by NZ IAS 24 Related Party Disclosures (paragraph 17). These included:

(b) the amounts of outstanding related party balances at balance date; (c) details of guarantees given by a related party; and

81. Seven issuers agreed to clarify or make the necessary disclosures in their next set of financial statements (change agreed). The remaining matter was resolved through the issuer providing additional information to the Commission.

82. The majority of the instances of inadequate disclosure or non-disclosure of related party information in Cycle 8 related to key management personnel information.

83. The Commission wrote to 18 issuers about the disclosure of key management personnel information as required by NZ IAS 24 (paragraph 16). “Key management personnel” is defined in NZ IAS 24 (paragraph 9). The definition includes directors and executives responsible for planning and controlling the entity, whether directly or indirectly, and includes directors (executive or otherwise). Paragraph 16 requires certain information to be disclosed about key management personnel compensation in total and for each of the specified categories.

84. As directors, whether executive or otherwise, fall within the definition of “key management personnel”, any compensation paid to directors needs to be taken into account in disclosing both the categories and the total amount of an entity’s compensation to key management personnel. This is notwithstanding that directors’ fees may be separately disclosed, as required by the Companies Act 1993

(section 211(f)⁹), elsewhere in the financial statements or annual report. Where issuers do not reclassify directors’ fees into the categories specified in NZ IAS 24 (paragraph

16), they need to disclose directors fees as an additional category or include a cross- reference to the appropriate note disclosing directors fees. Directors’ fees also need to be included in the total amount of compensation paid to key management personnel as required by paragraph 16.

(a) the non-inclusion of directors’ fees as part of key management personnel compensation;

(c) the disclosure of directors’ fees separately in another note in the financial statements (without any cross-references from the key management personnel compensation note); and

(d) the non-disclosure of key management personnel compensation in the required categories.

⁹This section requires a company to state (in the annual report) in respect of each director or former director of the company the total remuneration and other benefits received by the director or former director from the company during the accounting period.

(a) the non-disclosure of a share-based payment category, for example, the non- disclosure of share options issued to the Chief Operating Officer during the year and the non-inclusion of share-based payments in key management personnel compensation;

(b) the non-disclosure of categories of key management personnel compensation, for example, key management personnel compensation was disclosed as one total category and directors’ fees, share options expenses and other key management personnel compensation were separately disclosed elsewhere in the financial statements under different notes without any cross-references from the key management personnel compensation note; and

(i) the remuneration of the Chief Financial Officer and the executive team were included but directors’ compensation was excluded;

(ii) employee benefits and share-based payments were included but directors’ fees were excluded; and

(iii) where only one category “salaries and other employee benefits” was disclosed and only for “all directors and executives with greatest authority for strategic direction and management of company”.

87. Notwithstanding that in many instances related party information was disclosed elsewhere in the financial statements, the Commission considered that the issuers did not fully comply with NZ IAS 24 (paragraph 16).

88. Ten of the issuers written to committed to make better disclosures in their next financial statements (change agreed). The Commission’s queries to 6 issuers were resolved through additional information from issuers. The Commission reiterated its view for better disclosure through a second letter to 2 issuers.

89. The Commission considers the continued high incidence of inadequate disclosure or non-disclosure of related party information by issuers to be unsatisfactory, given the effect related party relationships can have on an entity’s financial performance, financial position and cash flows.

90. In the current economic conditions, when the financial performances of entities are likely to be poor, there is heightened interest in the compensation paid to directors and executives. Related party information is essential for users to assess the performance of the entity and that of management (and directors) vis-à-vis the entity’s performance.

91. The Commission considers that inadequate or non-disclosure of related party information in an issuer’s financial statements may also put the issuer at risk when conditions subsequently deteriorate. Non-disclosure or the lack of transparency of related party transactions may render the transactions questionable notwithstanding that there may be nothing untoward at the time the transactions took place.

92. To this extent the Commission considers that there needs to be improvement in disclosing transactions with related parties. Such disclosures should contain sufficient

information and be meaningful to enable users to gain an understanding of the potential effect of those transactions and whether they are carried out at arm’s length.

93. NZ IAS 1 (paragraph 122) requires an entity to disclose in the summary of significant accounting policies or other notes the key sources of the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognised in the financial statements.

94. Separately, NZ IAS 1 (paragraph 125) requires an entity to disclose information about the assumptions an entity makes about the future and other major sources of estimation uncertainty at the end of the accounting period that have a significant risk of resulting in material adjustment to the carrying amounts of assets and liabilities, including their nature and their carrying amounts as at the end of the reporting period.

95. The Commission’s 2008 News Releases suggested that issuers focus on disclosing the significant judgements used in the preparation of the financial statements, the key assumptions and the major sources of estimation uncertainty.

96. The Commission wrote to 4 issuers in relation to the disclosure requirements of NZ IAS 1 (paragraphs 122 and 125). The issuers either did not disclose information required under paragraphs 122 and/or 125 or merely included generic disclosures. It was not always clear from their disclosures which accounting policies had the most significant effect on the amounts recognised in the financial statements and what judgements, if any, management had made about those accounting policies. It was also unclear what assumptions, if any, were made by management about the future, what were the major sources of estimation uncertainty at the end of the reporting period, and which assets and liabilities had a significant risk of having their carrying amounts being materially adjusted within the next financial year as a result of those assumptions and estimates.

97. In 2 instances the areas that judgements had been made by management were identified. References were made to notes in the financial statements in 1 instance. However, the necessary information required by paragraphs 122 and 125 was not included in the notes.

98. Three issuers committed to make and/or improve their disclosures in future. One matter was resolved with the issuer providing additional information to the Commission.

99. The Commission also reminds issuers that even though it may be clear to them why particular judgements had been made, whether as a result of “always having been done under previous NZ GAAP and is generally accepted” or “relates to transactions that occurred in a previous period”, the paragraphs 122 and 125 disclosures are still required to be made and communicated to users to comply with NZ IAS 1.

100. The disclosure of key judgements and information about assumptions and sources of estimation uncertainty are important new requirements. The Commission suggests that issuers consider these requirements carefully. The information about management

judgements underlying accounting policies (paragraph 122) needs to be differentiated from the assumptions management makes about the future and other major sources of estimation uncertainty (paragraph 125). The information required by these two paragraphs also needs to be differentiated from accounting policies for those transactions. The Commission accepts that some of the paragraphs 122 and 125 information may overlap with information contained in the notes (especially where the information is also required to be disclosed under other Standards). Issuers must exercise judgement in determining what additional disclosures are required to comply with paragraphs 122 and 125.

101. The disclosure of judgements and assumptions underlying the accounting policies and accounting estimates is assuming, and will continue to assume, increasing importance. This is because of the move towards principles-based standards and because NZ IFRS increasingly requires qualitative information to be disclosed “through the eyes of management”. Management judgements and assumptions underlying the accounting policies and accounting estimates is one aspect of this qualitative information that is essential for understanding the basis of the quantitative financial information that is presented.

102. The Commission wrote to 18 issuers stating that there needed to be an explicit and unreserved statement of compliance with IFRS in the issuers’ financial statements, as required by NZ IAS 1 (paragraph 16).

103. The Commission discussed this matter in detail in its Cycle 7 Report. The Commission’s view is that making this statement is relatively easy but will significantly increase the confidence that overseas investors have that New Zealand issuers have adopted an internationally recognised basis of accounting.

104. The Commission wrote to 3 auditors about the disclosure in their respective audit reports that they had no other relationship with the issuers or any of their subsidiaries other than in their capacity as auditor. In 2 cases the issuers’ financial statements made the necessary disclosures about the nature of the other relationships and the amounts involved. However, the audit reports omitted the disclosures.

105. In the third case, it was unclear from the financial statements whether certain work carried out by the auditor constituted “other services”. The auditor clarified that the work was part of an audit.

106. The Commission drew the auditors’ attention to paragraph 25(e) of New Zealand Auditing Standard AS-702 The Audit Report on an Attest Audit. The Standard requires auditors to make a statement as to the existence of any relationship, other than that of auditor, between the auditor and the entity in their audit report.

107. Auditors and issuers must ensure that there is disclosure of all fees paid to the auditors. It is important that there is transparency in the types of services (other than audit services) and the related fees that are paid to an entity’s auditor. The provision

of other services, particularly where the amounts involved are large in relation to the total fees paid to an auditor, could compromise an auditor’s independence in carrying out audit work.

108. The Commission urges auditors to continue to be vigilant in the audit of financial statements. The Commission considers it important for auditors (and other market professionals involved in the process of financial reporting) to do their part in maintaining the quality and transparency of information provided by issuers in their financial statements.

109. Apart from the commonly occurring matters already discussed above, the Commission raised numerous miscellaneous matters with issuers in Cycle 8, either as a matter raised or as an other matter under various NZ IFRS. Most of these matters related to lack of clarity or non-disclosure of information.

110. In most cases, as reflected in the high percentage of change agreed, issuers agreed to amend future financial statements to take into account the matters raised. In other cases the matters were resolved through further information from issuers. Discussion on a matter is continuing with 1 issuer.

(a) 12 issuers about inadequate disclosure or non-disclosure of substantial security holder information under section 35F of the Securities Markets Act 1988; and

(b) 7 issuers about inadequate disclosure or non-disclosure of information about directors’ relevant interests or directors’ share dealing under sections 148 and

211 of the Companies Act 1993 and to 7 directors about their obligations under section 19T of the Securities Markets Act.

112. No enforcement action was undertaken in relation to market matters raised with issuers or with directors.

113. Section 35F of the Securities Markets Act requires every public issuer¹⁰that is a company to send a notice to each of its shareholders with or in its annual report (sent under section 209 of the Companies Act) or, in a notice (sent under section 209), stating the following:

¹⁰The Securities Markets Act 1988 (section 2(1)) defines a public issuer to mean: (a) a person who is a party to a listing agreement with a registered exchange:

(b) a person who was previously a party to a listing agreement with a registered exchange, in respect of any action or event or circumstances to which this Act applied while the person was a party to a listing agreement with a registered

(a) the names of all persons who, according to the register kept under section 35C of the Securities Markets Act, are substantial security holders in the public issuer at the record date¹¹; and

(b) the number and class of voting securities of the issuer (as per the register) which forms part of each substantial holding in the issuer as at the record date; and

114. For every other public issuer, the information is to be sent not later than 30 June in each year.

115. The Commission wrote to 12 issuers about substantial security holder information.

(a) disclosure of the number of voting securities held by a substantial security holder in the annual report being inconsistent with the information included in the notice filed by the substantial security holder with NZX;

(b) non-disclosure of substantial security holder information in the annual report for some of the substantial security holders;

(d) non-disclosure in the annual report of the number of voting securities of the issuer in which each substantial security holder has a relevant interest; and

(e) non-disclosure in the annual report of the total number of voting securities in the issuer.

116. Of the 12 issuers written to, 8 confirmed that their annual report contained errors, inconsistencies or omissions of substantial security holder information and committed to better monitor and disclose future information (change agreed).

117. Matters raised with 3 issuers were resolved when the issuers provided the Commission with further information to the Commission’s queries. In the first instance, the issuer confirmed that the relevant substantial security holder information had been provided to shareholders through a notice sent under section 209 of the Companies Act rather than through the annual report. In the second and third instances the matters were resolved through the issuers clarifying that the annual report disclosures reflected information contained in the issuers’ interests registers at the time. The Commission wrote a second letter to 1 issuer reiterating the disclosure requirements of section 35F of the Securities Markets Act.

118. The Commission wrote to 7 issuers about disclosures of directors’ relevant interests and/or share dealings in their annual reports as required by sections 148 and 211 of the Companies Act and sections 19T and 19U of the Securities Markets Act.

¹¹The “record date” is a date stated in the notice that is not earlier than three months before the notice is sent (Securities

119. Section 148 of the Companies Act requires a director of a company to make certain disclosures to the company on the acquisition or disposal of a relevant interest in the shares of the company and ensure that the particulars of such disclosures are entered in the interests register. Section 211 of the Companies Act requires the annual report of a company to state the particulars of the entries in the interests register made during the accounting period.

120. Section 19T of the Securities Markets Act requires directors and officers of public issuers to disclose their relevant interests and dealings in relevant interests in the securities of a public issuer within 5 trading days of:

121. Section 19U of the Securities Markets Act also requires the directors’ and officers’ relevant interests, acquisitions or disposals to be disclosed to the registered exchange on which the public issuer is listed and in the interests register of the issuer.

(b) the inconsistent disclosure of information about directors’ share dealings within different parts of the annual report;

(c) the inconsistent disclosure of information about directors’ share dealings between the annual report and notices filed with NZX; and

(d) failure to disclose dealings in relevant interests within 5 trading days to NZX.

123. In all instances the issuers agreed that their annual reports contained the errors that were drawn to their attention. Issuers committed to provide better disclosures in their next annual reports.

124. The Commission wrote to 2 of those issuers about the failure of directors to provide notices within 5 trading days (section 19T of the Securities Markets Act). The Commission asked for the issuers’ corporate governance policies on directors’ and officers’ disclosures and trading. In both instances the issuers confirmed that their directors and officers were aware of their obligations and policies with regard to disclosures and trading and that they took any non-compliance seriously. The issuers committed to improve their company policies and processes in this respect. For these

125. The Commission wrote to 7 directors of 3 issuers directly about their obligations under section 19T of the Securities Markets Act. They related to the failure of the directors to lodge directors’ relevant interest notices within 5 days of the acquisition or disposal of relevant interests in the issuers. The Commission accepted the further explanations from the directors.

126. Three issuers also advised the Commission that they intend to improve their administrative processes with regard to the filing of the section 19T information by their directors and officers.

127. The Commission considers that the priority for issuers, auditors, standard-setters and other market professionals in the current economic environment is to ensure that complete and transparent disclosures are provided in the financial statements of issuers to restore investor and market confidence in the securities market. This requires, where necessary, the inclusion of explanatory disclosures to support the financial information that is presented.

128. The Commission considers that there should be continual improvement in the quality of disclosures to ensure that the information presented is relevant and tailored to explaining the issuer’s activities and operations for the period. The Commission has noted that some issuers merely carry forward information about activities and operations disclosed under previous NZ GAAP. This indicates that these issuers have not fully “adopted” or familiarised themselves with the requirements of NZ IFRS. While in some cases there may not be a major change to the information required, in other cases the information required will be significantly different. In the current economic environment issuers must be vigilant in ensuring that the information they present is relevant and reflects the current market conditions.

129. The purpose of financial reports is to enable an entity to communicate with users. The Commission encourages issuers to make full use of this communication in order to restore investor and market confidence. In a speech by Bob Hertz (of the US Financial Accounting Standards Board) on 18 September 2008 “Lessons Learned, Relearned, and Relearned Again from the Credit Crisis – Accounting and Beyond”, Mr Hertz stated:

“External financial reporting is not merely a compliance exercise, nor is it an opportunity for spin. Rather the primary intent is to inform investors and the capital markets. What you measure matters! And accountability requires honest accounting and informative disclosure, even when the news is bad...

Good reporting requires sound standards; it also requires faithful application of those standards.”

130. The Commission will continue to review issuers’ financial reporting as part of its

131. In addition, the Commission will follow up and review the next annual reports of those issuers who have agreed to make the necessary changes to ensure that those matters raised have been taken into account.

132. The Commission will take any appropriate steps to encourage and ensure compliance with NZ IFRS (and other aspects of NZ GAAP) and relevant legislation.

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL REPORTING SURVEILLANCE PROGRAMME

1. The Securities Commission is the main regulator of the New Zealand securities market. 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.

2. The Commission regards quality financial reporting by issuers¹²to be fundamental to the fairness, efficiency and transparency of New Zealand’s securities markets.

3. 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”.

4. As part of its work to carry out this function the Commission established the Financial Reporting Surveillance Programme (FRSP) in 2004, with its first Cycle review taking place in 2005. The FRSP is an ongoing surveillance programme.

5. The aim of the Commission’s FRSP is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

(b) investors can have confidence in the credibility of financial information provided by issuers; and

6. The FRSP involves reviews of selected issuers’ financial statements. At the end of each cycle the Commission will publicly report on this surveillance work to provide market participants with a summary of its findings. Copies of reports for all cycles are available on the Commission’s website www.seccom.govt.nz.

(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:

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.

7. Under the Financial Reporting Act 1993 issuers are required to prepare financial statements that comply with New Zealand Generally Accepted Accounting Practice (NZ GAAP) and provide a true and fair view of the matters to which they relate¹³.

8. The Commission reviews financial statements of issuers 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:

(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:

9. The term “applicable financial reporting standard” is defined in the Financial Reporting Act to mean an approved financial reporting standard that applies to a reporting entity (or group) and to an accounting period (or interim 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 the Financial Reporting Act. All issuers are required to apply NZ IFRS in the preparation of their financial statements for annual accounting periods commencing on or after

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

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

11. The FRSP aims to review all issuers listed on NZX Limited (NZX) at least once over a three to four year period.

¹³Part II of the Financial Reporting Act 1993 (section 11) 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, Section 2 of the Financial Reporting Act 1993 defines a reporting entity as : (a) An issuer; or

12. In reviewing all listed issuers, dual and overseas listed issuers may also be selected.

Overseas listed issuers are issuers domiciled or incorporated outside New Zealand which have a recognised stock exchange as the home exchange and are also listed on NZX.

13. Dual listed issuers are issuers incorporated in Australia which are on the Australian Stock Exchange’s (ASX) Official List and which are also listed on the NZX. No dual listed issuers were reviewed in Cycle 8.

14. Where dual and overseas listed issuers are selected the Commission first writes to the regulator in the overseas jurisdiction to determine whether a review of the financial reporting of the issuer has already been undertaken locally. If so, these issuers are not reviewed by the Commission. Where the issuer has not been reviewed by the overseas regulator, the Commission undertakes a review of the annual report, NZX announcements and, if applicable, the current prospectus. Where appropriate, findings are communicated to the overseas regulator. If the Commission communicates a matter about an issuer that it considers to be significant to an applicable overseas regulator and the overseas regulator proposes to take no action, the Commission will write directly to the overseas or dual listed issuer on the matter.

15. Issuers trading on the Unlisted¹⁴exchange and issuers not listed on any exchange may be also included in the cycle reviews.

16. Issuers may be selected based on particular criteria as determined by the Commission: issuers may be selected based on areas of particular risk affecting the issuer, the sector the issuer is in at the time of selection and/or their balance dates. Issuers can also be reselected for a subsequent review where the nature of issues identified in an earlier cycle raised concerns.

17. The Commission reviews an issuer’s financial statements when reviewing its annual report and, in the case of listed issuers, this includes a review of any NZX announcements for the period and any relevant prospectuses. While the NZX announcements are not comprehensively reviewed, any market matters relating to continuous disclosure, disclosure of relevant interests by directors and officers, and substantial security holder disclosure, are followed up where necessary.

18. Matters identified in the review are referred to as matters raised¹⁵or other matters.

19. Matters raised are matters that are important or where further clarification or information is needed. For example, the Commission is likely to write to an issuer where a matter:

¹⁴Unlisted is an unregistered securities trading facility; it is not a registered stock exchange or authorised securities exchange under the Securities Markets Act 1988. Unlisted provides a facility for trading previously allotted securities.

¹⁵Prior to Cycle 6, the Commission referred to matters raised as significant matters.

20. Financial reporting requires the exercise of professional judgement. The Commission takes this into account when reviewing the financial statements and determining which matters to follow up.

21. The Commission writes to an issuer requesting additional information and in some cases asks the issuer to revise or enhance disclosures in future financial statements.

22. When writing to an issuer in respect of matters raised the Commission also includes other matters found in the review in relation to that issuer. Other matters are miscellaneous matters that the Commission considers could be better disclosed.

23. The Commission’s policy is not to write to an issuer whose financial statements raised only other matters, unless the number of those matters is so numerous that it is useful to provide feedback to the issuer. In this respect the Commission is mindful of its educative role in the FRSP.

24. In each case where the Commission writes to an issuer, a copy of the letter is also sent to the issuer’s auditor. This practice acknowledges the role of auditors in helping to maintain and improve the standard of financial reporting in New Zealand. It also alerts an auditor to the particular aspects of its client’s financial statements that may be of concern to the Commission.

25. Auditors have an important role in encouraging companies to comply, not only with the statutory requirements, but also with best practice. The Commission encourages auditors to be vigilant in the audit of financial statements. High quality external auditing is critical to the integrity of financial reporting and to the efficiency and integrity of the securities markets.

26. Where a matter is identified that may have a significant market impact the matter is removed from the FRSP and considered separately as an enforcement matter.

27. Referrals are also made to appropriate bodies where matters identified in the FRSP

New Zealand Securities Commission

Financial Reporting Surveillance Programme. Review of Financial Reporting by Issuers Cycle 8 [2009] NZSecCom 2 (31 March 2009)