One of the main talking points at a high-powered conference this week was how to make financial statements more accessible to individual investors.

The conference – “Beyond IFRS – Quality Company Reporting” – was sponsored by the Financial Markets Authority (FMA). It attracted a large number of listed company executives, particularly chief financial officers.

IFRS stands for International Financial Reporting Standards and NZ IFRS is the New Zealand equivalent of IFRS.

The main issue is that NZ IFRS, which contains more than 2000 pages including additional material, is incredibly complex. This means that financial statements have become much more detailed, and difficult to understand, while individuals are reading less and less of these documents.

For example, the Chorus/Telecom demerger document contained 525 pages, the Meridian Energy prospectus 224 pages and the Mighty River Power prospectus 256 pages.

There is a widely held belief that the bigger the document the less likely it is to be read.

In addition, companies are encouraging shareholders to switch from printed to electronic annual reports. These electronic documents are hard to print on home computers and are very hard to read when two pages of an annual report are squeezed on to one electronic page.

The situation is exacerbated by an increasing number of companies emphasising adjusted, normalised or underlying profits, instead of NZ IFRS compliant figures. One keynote speaker called this “profit reporting on steroids”.

The way we are going it won’t be long before we also have “modified profits”, “tweaked profits”, “fine-tuned profits” and many other forms of profit.

The widespread use of adjusted, normalised and underlying earnings – also called non-IFRS profits – indicates that more and more companies do not believe that NZ IFRS gives an accurate assessment of the performance of their company.

There are two distinct views on these non-IFRS figures.

The first is that company directors have a better understanding of the performance of their company than the accountants who compiled the NZ IFRS standards. These companies should be able to emphasise their non-IFRS figures and downplay the profit figures in their audited financial statements.

The main argument against this is that it would create total anarchy because there are no guidelines regarding these non-IFRS figures. Companies could report what they like and it would be extremely difficult for investors to compare one company with another, particularly individual investors.

A second opinion, expressed by an Australian Securities and Investments Commission (ASIC) representative, is that non-IFRS figures were acceptable as long as they were not given more emphasis than the IFRS-compliant earnings. He said that broker analysts played an important role in this area because they assessed whether these non-IFRS figures were more realistic than the audited IFRS financials.

Broker reports were fairly widely available in Australia and these reports provide individual investors with an analysis of any non-IFRS profit figures.

The problem with this argument – as far as New Zealand is concerned – is that there are fewer and fewer broker analysts covering a declining tally of companies. Several of our larger broking firms are overseas owned and they don’t seem to have a major commitment to New Zealand company research.

In addition, Australia has a national financial daily while Melbourne and Sydney have two additional daily newspapers with extensive coverage of company results. Individual investors are much better served across the Tasman because all three newspapers report major company results as well as having additional comment and analysis of the figures.

New Zealand investors do not have the same volume of broker or media critique and analysis.

A widely held view at the conference is that New Zealand has disclosure overloads as well as disclosure inadequacies. This has come about because companies are producing far too much information that investors don’t want to read while they are not publishing the data investors are really interested in.

In other words, companies need to identify the users of their financial reports and the information these readers want. Information and analysis should then be delivered in a clear and concise form. The last thing we need is more pages added to the country’s 2000-plus pages of accounting standards.

The onus should be on directors to disclose their company’s key objectives and explain – in simple terms – whether these objectives are being met. Several companies are making a major effort to improve their financial reporting, including:

• Chorus has an excellent management commentary section (beginning on page 5 of the 2013 annual report).

• Green Cross Health has an easy-to-read financial summary (pages 6 to 8 of the 2014 annual report).

• Comvita has a detailed five-year summary (page 3 of the 2014 annual report).

This list is not exclusive but it highlights a number of companies that are making a big effort to improve their communications with shareholders and potential investors.

New Zealand companies need to raise the bar because the latest Reserve Bank figures show that only $2.2 billion, or 9.7 per cent, of total KiwiSaver funds are invested in the NZX while A$724.9 billion, or 41.5 per cent, of total Australian superannuation funds are invested in ASX-listed companies.

Many will argue that the low level of KiwiSaver investment in the domestic sharemarket is because the NZX is a relatively small market. The contrary view is that the NZX is small because our companies are poor communicators and do little to attract investors to the domestic sharemarket.

The major missing link in New Zealand is the relationship between the key performance indicators (KPIs) of senior executives and the adjusted, normalised and underlying profit figures. Are NZ IFRS figures “adjusted” in order to achieve the senior management team’s KPI targets? Are KPIs set against NZ IFRS or non-IFRS figures?

These links are rarely explained in New Zealand.

Australian companies are required to have a detailed remuneration report in their annual reports which sets out the remuneration of senior executives and helps to explain the links, if any, between KPIs and non-IFRS profit figures.

The inclusion of a remuneration report in New Zealand annual reports would help explain any links between KPIs and adjusted, normalised and underlying profit figures. It would also attract far more annual report readers because one of the first places Australian shareholders go to is the remuneration report.

Accounting policies and disclosures are important because New Zealand’s two recent capital market disasters – the 1987 sharemarket crash and the 2000s finance company meltdown – were largely due to accounting issues.

The 1980s sharemarket boom and bust was primarily caused by creative accounting, inadequate disclosure and excessive related party transactions.

The Securities Commission issued two reports on the finance company sector in 2004 and 2005 identifying a number of important accounting disclosure issues. These were in relation to revenue recognition, related party transactions, lending policies and risks.

There was little follow up to these reports and the finance company sector collapsed because of poor accounting policies, inadequate disclosure and too many related party transactions.

New Zealanders have a strong preference for direct property investment, partly because they believe our public issuers have inadequate disclosure levels and poor investor communications.

The widespread use of adjusted, normalised and underlying profits exacerbates this situation, particularly when the differences between NZ IFRS and non-IFRS figures are not clearly explained.


Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management holds Chorus, Green Cross Health and Comvita shares on behalf of clients.