Easter break adds minor irritation to March 31 financial year calculation

Thursday 28th March 2002

The four-day Easter break coincides with March 31 for the first time since 1997 and should be an interesting time for companies and investment markets.

March 31 (Easter Sunday this year) is still an important financial day despite the government and many companies having a June 30 balance date.

Some companies end their financial years at this time, fund managers balance for a quarter or longer period depending on their years, and individuals face up to the tax period cutoff.

The government's decision to move to a June 30 balance date goes back years. It includes local authorities and their rating procedures but has little effect on individuals who base tax liabilities on the situation at March 31.

An "autumnal" March 31 year end differs from the situation when December 31 falls into a four-day New Zealand closedown.

Individuals or those who can do so do not need to adjust their financial situations at the end of the calendar year for tax purposes, although December 31 is relevant to company and investment funds' affairs.

Ending a year within a four-day Easter range has complications for investment markets, due to Good Friday.

The London, New York, most European, Australian and New Zealand stock exchanges close on that significant day for countries professing a Christian heritage.

Other markets are open, a point to note in these days of globalised 24-hour days investment.

For example, investment funds holding Japanese securities will be unable to close that portion of their portfolios tonight.

The Tokyo sharemarket does not observe Good Friday.

Daily newspapers will report today's international market movements on Saturday.

We may see the usual references to "window-dressing" or denials of it.

"Window-dressing" involves trading small share parcels at artificial prices in companies that already have a good weighting in a portfolio to lift the overall value of the holding at balance date.

Denials can be ignored. Brokers and fund managers are sensitive about a common practice over which regulatory authorities and auditors worldwide have no control.

When the Easter break coincided with March 31 in 1997, comments about the New Zealand market's performance on Thursday, March 27 were published on March 29, Easter Saturday, and included the view that window-dressing was hard to justify, given the apparent high volume of shares traded on our exchange.

It was true that 228.63 million shares were traded with a value of $122.63 million, but tiny share parcels went through in some minor stocks.

Leaders contributed most of the volume and value, overshadowing small trades.

Australians took a different view.

A closeout of the March share price index futures contract and expiries of share options affected equity trading, as did 'investor positioning" on the last trading quarter day of the March quarter.

Blue-chip share prices fell in New York after concern about potential interest rate hikes. There was window-dressing in second-line stocks. London had a similar mix.

Canny individual investors know they should stay away from equity markets on the last day of a quarter, particularly when March 31 and Easter coincide, unless they want to compete with fund managers.

Companies are used to March 31 falling on a weekend. The date's coincidence with Easter is a minor irritation but one that could add some administrative costs. It is easy to calculate March 31 figures at any time after that date.

There are few opportunities for window-dressing in industrial organisations, apart from juggling creditors and interest payments to increase operating cashflows. A company's debtors can do the same in their cashflow statements and statements of financial position. Neither side of the debtor/creditor equation can use such techniques in statements of financial performance under accrual accounting rules.

A peculiar phenomenon can occur in investment funds with international exposures when March 31 coincides with Easter.

New Zealand-based funds, for example, may engage overseas managers to handle investments in countries where local knowledge enhances performance. Overseas operators will often be subject to monitoring procedures of international "custodian" organisations that check reported returns against their assessment of values.

There were situations in 1997 when significant discrepancies arose between managers' and custodians' valuations. March 31 was Easter Monday, some markets operated on Good Friday and the Monday and others closed out on Thursday, March 27.

Variations always occur if the overseas manager uses, say, exchange rates at close of business in London on a given day and custodians calculate on the New York 5pm close, five hours after London. Add in the effect of open/closed markets on Good Friday and Easter Monday to the March 31 cutoff and the differences may range to more than 5% before a final conversion to New Zealand currency.

Express that in dollar terms and you get a lot of "floating" money on multibillion-dollar portfolios.

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