As part of FMA's theme based monitoring projects on financial reporting, FMA has reviewed the accounting classification and disclosure of financial instruments, classified as hybrid instruments, and listed on the NZX debt market.
In their resulting report, FMA has indicated that disclosures around hybrid financial instruments need to be improved. In particular, issuers should pay careful attention to disclosure of:
- how the classification of the instrument as debt or equity was determined, linking this to critical terms of the instrument, explaining those terms and any significant judgments; and
- other critical terms that may impact returns to other investors, including dividend stoppers, whether interest is cumulative and any step-up penalties.
Although issuers may not necessarily breach the law if they do not follow the recommendations FMA has set out in its report, doing so will increase the likelihood of compliance with the regulatory requirements.
For FMA's full findings and recommendations see the report here.