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Valuation assumptions vital to IFRS compliance

Wednesday 21st April 2010

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Too many listed issuers are failing to include the assumptions they're using when writing down the value of assets or determining fair value for financial instruments, says the Securities Commission in its latest Review of Financial Reporting by Issuers.

Following its 11th cycle of public issuer scrutiny, the commission reports "a consistent series of technical breaches in financial reporting areas which the Commission has highlighted in its earlier news releases and public reports".

However, the commission gives New Zealand companies an essentially clean bill of health, saying levels of compliance with the new, more rigorous International Financial Reporting Standards (IFRS) is "appropriate for a developed capital market like New Zealand", but that there is "still room for issuers to improve".

The latest review took in statutory reporting by 12 NZX-listed companies, seven with debt listed on the NZDX, two on the NZAX alternative exchange, one on the Unlisted exchange, and two companies not listed on any exchange. Among these were seven financial institutions. Some 68 issuers reporting under IFRS have been examined over the last three reporting cycles.

In particular, the report noted failure to disclose enough information to allow an investor to judge how valuations are determined.

"Specific significant assumptions" must be disclosed in cases of revaluation of goodwill and intangible assets for impairment, and the valuation of property, plant and equipment "to allow users to determine whether the resulting valuation is realistic and has been reliably determined", the report said.

The commission also made it clear that companies must actually state they are complying with IFRS.

"A statement such as 'compliance with NZ IFRS ensures compliance with IFRS' is not an explicit and unreserved statement of compliance," it said.

Also important was the growing requirement, especially under IFRS rules coming into force in the near future that financial statement disclosure in key areas, such as liquidity risk, be on the same basis as senior management reporting and include "summary quantitative data about their exposure".

The commission warned two audit firms about failing to include disclosures in their own reports on financial statements that they did other work for the issuer in question, even though the issuer had made such disclosures in the notes to the accounts. Detailed disclosure of fees and areas of activity were required.

The report also raised the need to report credit risk analysis that includes security type, as well as geographic, industry and counter-party credit risk analysis, in part because "one main contributor to significant loan impairments of property finance companies has been high levels of subordinated lending".

The review system is intended to expose common non-compliance issues through regular scrutiny of a range of public issuers' accounts and other statutory disclosures to lessen rather than punish non-compliance.

Any serious matters become commission investigations. This had happened with as many as four of the 34 matters raised by the commission, with individuals involved in a "breakdown in financial reporting controls" leading to erroneous related party transaction disclosure being referred to the New Zealand Institute of Chartered Accountants rather than sparking a prosecution.

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