By Gareth Vaughan
A tweak to the local version of international accounting rules means finance companies funded from non-public debenture sources, retail and mortgage funds and securitisation vehicles including those used by the banks, no longer have to disclose their exposure to financial instruments such as hedging contracts in their financial statements, according to PricewaterhouseCoopers partner Sam Shuttleworth.
Shuttleworth told interest.co.nz this is because the definition of "financial institution" in what's known as Appendix E of New Zealand International Financial Reporting Standard (IFRS) 7 has been changed by the New Zealand Institute of Chartered Accountants' Financial Reporting Standards Board to now only cover "deposit takers" as defined by the Reserve Bank of New Zealand Act.
"While all entities will still need to apply with NZ IFRS 7, my initial thoughts are the following entities may now be able to remove (if they so wish) the various Appendix E disclosures given the definition of a financial institution has now changed to that of a deposit taker: A finance company who sources third party wholesale funding or uses a commercial paper programme to fund its financial assets, a securitisation vehicle, a retail fund that invests in debt securities, or a mortgage fund," Shuttleworth says.
Financial instruments are basically anything to do with financial assets and financial liabilities including derivatives. They're financial risk disclosures around credit risk, liquidity and market risk such as foreign exchange contracts. Finance companies that could now choose not to disclose their financial instrument exposure include the likes of Instant Finance, which funds its consumer lending through a funding line from Fortress Credit Corp, and Oxford Finance, which recently quit taking public debentures and now sources funding through a BNZ loan.
Shuttleworth says Appendix E was introduced alongside the IFRS standards to make sure the information that had been publicly available in the past still was under IFRS. But now a move was being made away from prescribed rules to more general principles. The change now makes sense, says Shuttleworth, in the sense that the IFRS regime is about global harmonisation of standards and a New Zealand based financial services company shouldn't have to disclose more than what’s required internationally.
"What will be interesting though is if they (companies and entities that don't have to) still report this information because it is salient information, highlighting what the risks are," Shuttleworth says. "So whilst the prescriptive (directive to) follow these rules may go away, because of the IFRS7 being principle based, they (the financial instrument disclosures) still may still appear."
Following the demise of dozens of finance companies (see our Deep Freeze List here for full details) and the global financial crisis, the Reserve Bank has taken on regulatory oversight of non-bank deposit takers (NBDTs) through a regime that has been progressively introduced over the past couple of years and continues to be rolled out.
The central bank’s role includes licensing NBDTs, developing and enforcing minimum prudential and governance requirements and applying credit rating requirements. Trustee corporations continue as the front-line supervisors of deposit takers. In a consultation paper released last October the Reserve Bank noted that, among other things, it wants to be able to obtain court orders banning individuals from participating in NBDTs for up to five years.
Here's the Reserve Bank's definition of what a deposit taker means:
A deposit taker is defined in section 157C of the Reserve Bank Act and means a person who (a)
(i) offers debt securities to the public in New Zealand; and
(ii) carries on the business of borrowing and lending money, or providing financial services, or both;
and (b) includes: (i) a building society as defined in section 2(1) of the Building Societies Act 1965, unless the building society is a registered bank;
and (ii) a credit union as defined in section 2 of the Friendly Societies and Credit Unions Act 1982;
and (iii) a person or class of persons that is declared by regulation to be a deposit taker for the purposes of this Part [Part 5D of the Act] of the Act;
but (c) does not include: (i) an issuer of a collective investment scheme; (ii) a registered bank; (iii) a local authority; (iv) the Crown (as defined in section 2(1) of the Public Finance Act 1989); (v) a person or class of persons that is declared by regulation not to be a deposit taker for the purposes of this Part [Part 5D of the Act].
For the purposes of this Part [Part 5D of the Act], a reference to an offer of debt securities to the public has the same meaning as an offer of securities to the public as set out in section 3 of the Securities Act 1978.
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