Commercial confidentiality no shield under IFRS: Diplock

Wednesday 21st October 2009

New Zealand companies' compliance with new international accounting rules is "very patchy" as boards struggle with a "cultural" aversion to disclosure, says the chair of the Securities Commission, Jane Diplock.

In an interview with BusinessWire, Diplock said one of the fundamental changes of the International Financial Reporting Standards imposed in 2007 is that "you can't hide behind commercial confidentiality".

"Some companies find that difficult to come to grips with. It's a cultural change," said Diplock. "Frankly, I think some people resist this because they have been able in the past to get away without having to explain things in this level of detail."

For example, companies should no longer be issuing forecasts which contain no information about the underlying assumptions that drive the topline numbers; nor should asset revaluations or impairments be stated without explanation of valuation methodology and underlying assumptions about the economic conditions driving a conclusion.

"Disclosing the thought processes for those assumptions will help investors to understand whether you are being balanced or wildly optimistic.

"IFRS is trying to give the investor, the reader of the accounts, a story about what the management's thinking is, about the assumptions that underlie the way in which this company functions and why things are valued the way they are. That's a transition that isn't proving easy for everyone."

Diplock issued a warning earlier in the week to company directors that disclosure was below par in too many of the 20 annual reports studied in the latest of 10 regular reviews of reports since the 2007 IFRS introduction.

Particular examples included a company that used the same economic growth assumptions in three completely different markets, and the widespread inclusion of property revaluations in property trust accounts without adequate explanation of valuation metrics and process.

Related party transactions also continued to be under-reported to meet IFRS standards.

The Commission had not come across examples of material breaches that could, in the case of listed companies, have led to a notification to the NZX of a potential Listing Rule infringement, and companies appeared to appreciate that IFRS made substantial new demands of them.

"I'd give New Zealand companies an eight or nine out of 10 for knowing they have to take IFRS seriously," she said. "But either they don't like the results or the inputs they have include as disclosure, neither of which are credible reasons to oppose IFRS.

"Compliance gets a very patchy report card. There are some blind spots, some of which have been flushed out by recessionary times, especially relating to revaluations and impairment."

Diplock acknowledged, however, that the international accounting community was struggling with the treatment of financial instruments under IFRS, and that there would inevitably be change in that area.

The Commission's review process involved working not only with companies that it identified as failing to give adequate IFRS disclosure, but also with their auditors, to ensure that the Commission's expectations were well understood in the accounting and audit professions.

Businesswire.co.nz

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