FMA concludes inquiries into Fonterra’s 2019 financial statements and complaints relating to valuations of Beingmate and China Farms

The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko – has closed its inquiries that followed Fonterra’s 2019 financial statements market announcement. The FMA did not find evidence to support regulatory action, including litigation, under the Financial Markets Conduct Act.

The FMA’s inquiries followed complaints about the timing of the accounting write-downs relating to Beingmate Baby and Child Food Co Limited (Beingmate) and China Farm assets (China Farms). The values of these, and other, assets were re-stated in a Fonterra market announcement in August 2019.

Prior to these inquiries, the FMA had also reviewed the valuation of Beingmate in Fonterra’s 2017 financial statements and China Farms in its 2018 financial statements.

In the context of these various inquiries, the FMA has spent considerable time seeking to assess the reasonableness and supportability of forecasts used, and assumptions applied, in valuing parts of Fonterra’s business and related disclosures.

Findings regarding the valuation of Beingmate

From September 2017 to April 2018, the FMA engaged with Fonterra on its valuation of Beingmate for the year ended 31 July 2017. The engagement focused primarily on the base share price and the premium applied in the valuation of this investment.

Fonterra wrote down the Beingmate investment by $405 million in its half year financial statements for the period ended 31 January 2018, and enhanced its disclosures relating to the key inputs and assumptions, including the sensitivity of the value of the investment to changes in key assumptions.

Findings regarding the valuation of China Farms

The FMA engaged with Fonterra regarding its valuation of China Farms prior to the release of Fonterra’s 2018 financial statements. As part of this engagement, the FMA reviewed the calculations and assumptions used by Fonterra management in the valuation of these assets.

During this engagement, Fonterra enhanced its relevant disclosures on key assumptions, and sensitivities to changes in key assumptions, applied in the valuation of China Farms.

The FMA acknowledges the duration of these inquiries, while also highlighting the complexity and technical nature of any inquiry where significant judgements and assumptions are used in determining valuations. Both the quantity and sufficiency of accounting records provided by entities in complex areas such as valuations and impairment of assets has an impact on the FMA process.

Further guidance on financial statements

The valuation of non-financial assets, including goodwill, continues to be an important area of focus in the FMA’s financial reporting monitoring activities. This includes a focus on the requirement to keep, and be able to make promptly available, proper accounting records to ensure compliance with applicable accounting standards.

Significant judgements and critical accounting estimates

Appropriate consideration of areas of significant judgements and accounting estimates is important because of the potential impact on the financial position and results of a reporting entity. In 2018 the FMA issued an Information sheet which highlights that FMC reporting entities should ensure adequate levels of disclosures regarding significant accounting estimates and judgements, and relevant sensitivities to changes in key assumptions.

The FMA reminds directors that they are primarily responsible for ensuring that reporting entities prepare quality financial statements and information on a timely basis.

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