Securities Commission urges caution as property slump hits

The Securities Commission has warned issuers of securities such as finance companies and listed companies to be careful in how they report their results and present their offers because of the current liquidity squeeze and softness in the property market. It said it would review all financial reports in the year to June 30 as part of "Cycle 8" of its financial reporting surveillance programme. Here is the full Securities Commission release below.

The Securities Commission will review how well issuers respond to significant reporting challenges in the current market as part of its surveillance programme. The Commission will begin this work by reviewing 30 June 2008 balance date financial reports as part of Cycle 8 of its Financial Reporting Surveillance Programme. "All participants involved with the financial reporting process need to understand the potential impact of current market turbulence on the issuer, particularly the liquidity squeeze and a degree of softening in the property sector," Commission Chief Accountant Alastair Boult says. "It is essential that issuers understand the risks, adequately assess and measure them, and have appropriate responses in place." Current market conditions highlight the importance of the new accounting standard on financial instruments disclosures (NZ IFRS 7). This requires detailed information on the risks arising from financial instruments and how these risks are being managed. "Good disclosure will assist in keeping the market well informed. The key here is not mere compliance with the standard, but issuers telling the full story about the risks they face and how they manage them," Mr Boult says. The Commission expects issuers to pay particular attention to:

• Impairment of asset values - there should be more focus on understanding, measuring and documenting the triggers of impairment
• Determining fair market values - challenges in valuation practices and disclosures exist with the tight credit and illiquid markets. There should be a focus on valuation methodologies and processes and the disclosure of key assumptions, risks and uncertainties
• Going concern - appropriateness of the going concern assumption should be assessed and where relevant, disclosure of levels of uncertainty
• Significant judgements - all significant judgements used in preparing the financial statements and sources of estimation uncertainty should be disclosed
• Classification of debt - it is essential that the classification of the maturity of debt is accurate and loan covenants are well understood particularly in terms of triggers
• Goodwill disclosures - in the current market, particular regard should be given to the extensive disclosures relating to the recoverable amounts of each significant cash-generating unit containing goodwill or intangible assets with indefinite useful lives.
• Other areas of focus for the Securities Commission when reviewing financial reports will be related party disclosures, and the use of and disclosure of off balance sheet arrangements.

"We believe it is important that NZ IFRS is rigorously applied by issuers because this is integral to New Zealand having a fair, efficient and transparent securities market," Mr Boult says. The Commission urges issuers to further improve the quality of their financial reporting. This includes making transparent disclosures, ensuring that the "˜basics' of NZ IFRS are complied with, avoiding "˜boiler plate' accounting policies and notes and ensuring that any "˜common industry practice' also complies with New Zealand Generally Accepted Accounting Practice (NZ GAAP). If disclosures beg a further question, the Commission considers that transparency has not been achieved.