Financial Markets Authority seeks financial information from Fonterra amid concerns over writedowns and losses

Fonterra CFO Marc Rivers, Chairman John Monaghan and CEO Miles Hurrell face the media after announcing a net loss of $196 million. Photograph/Dean Purcell.

The Financial Markets Authority has knocked on the door of dairy company Fonterra, seeking information over concerns about its shock asset writedowns announcement and 2019 year financial statements.

The FMA's unusual confirmation to the Herald about its inquiries follows Fonterra's largest farmer-shareholder Colin Armer making a formal complaint to the regulator about Fonterra's audited accounts for, and including, the years 2015-2018.

Armer, a former Fonterra director, claims there have been inconsistent valuation methods for the carrying values of Chinese investment Beingmate, which is listed on the Chinese stock market, and China Farms. He has also asked the FMA to investigate Fonterra directors' calculations on executive performance pay and why they were not independently audited.

"The FMA has engaged with Fonterra's management and asked for information regarding concerns about Fonterra's recent announcement and its pending financial statements for the last period," the FMA said in a statement to the Herald.

"We are now considering what further information may be required to assist our enquiries.

"The FMA will also relay the complainant's concerns about Fonterra's financial statements over the past four years to CAANZ (Chartered Accountants Australia New Zealand/NZICA), which is the frontline regulator of licensed audit firms.

"We will engage with the NZICA over this matter and provide support where needed," the FMA said.

On August 12, Fonterra announced that writedowns would plunge the farmer-owned cooperative and world's biggest dairy exporter into a loss of $590m-$675m in FY19.

Fonterra CEO Miles Hurrell. Photo/Dean Purcell.

Chief executive Miles Hurrell said it had become clear Fonterra needed to reduce the carrying value of several of its assets and take account of other one-off accounting adjustments, which would total about $820m-$860m.

In his complaint, Armer told the FMA nearly $4 billion had been written off shareholders' balance sheets over the period he was concerned about.

Fonterra

Fonterra, in a statement to the Herald from chief financial officer Marc Rivers, said the company met the FMA the week it announced the impairments and discussed its methodology and rationale for the decisions.

Fonterra would "continue the conversation with them throughout the reporting process."

The company will publish its FY19 results on September 12.

"We operate in a legislative framework which is regulated by the FMA. Our financial statements are independently audited every year," Rivers said.

"The writedowns we recently announced were in line with our market disclosure obligations, are all approximates and are yet to be audited. Those decisions were made as a result of the full review of the business which has taken place across the year, as well as the work done so far to prepare our financial statements for FY19."

Fonterra CFO Marc Rivers faces the media after announcing a net loss of $196 million. Photo/Dean Purcell

The numbers could change following the audit, Rivers said.

Fonterra had a "constructive professional relationship with the FMA and respect their role in ensuring investors are fully informed."

Rivers said he and other Fonterra managers, along with directors, would answer shareholders' questions "face to face" after the results.

PwC has been Fonterra's auditor since the company was founded in 2001. It surrenders the contract this year after strong criticism of its claimed closeness to the Fonterra board by some shareholders including Armer and former Fonterra deputy chairman Greg Gent.

PwC has said it does not comment on client matters.

Two of Fonterra's directors Bruce Hassall and Brent Goldsack are former PwC partners. The chairman of the Fonterra Shareholder Fund, the unit trust set up in 2012 to enable non-farmers to buy non-voting, dividend-carrying shares, is PwC's former chairman John Shewan.

KPMG will become Fonterra's auditor after the company annual meeting in November if shareholders agree.

Armer, in his complaint to the FMA, said Beingmate, an investment on which Fonterra has taken heavy losses, was valued based on its future earnings. But China Farms which had never produced any Ebit was valued based on the individual animal/asset values.

"In the FY18 accounts, the carrying value of the Beingmate investment was reduced, but (was) still at a premium to the market value."

Former Fonterra director Colin Armer told the FMA nearly $4 billion had been written off shareholders' balance sheets over the period he was concerned about.

Armer told the FMA he had written to PwC in April 2017 challenging the firm with his asset valuation concerns. The response was three PwC auditors coming to his Taupo farm to meet him.

"I was assured that all was ok with their accounting treatments, and through this conversation I raised the question of the valuations and the impact on executive performances pay. The response was that they had not been completing any audits on these as (former) Fonterra director and audit chairman David Jackson attended to these."

Armer told the FMA that ultimately, it was compulsory for farmers to purchase shares in Fonterra in order to supply milk - one share for every kilogram of milk solids provided.

"There have been hundreds of thousands of share transactions in the ... four year period that in my view were based on inflated valuations."

His complaint said Fonterra's 10,000-or so shareholders have been "badly let down by the independent auditors" who had been "captured by the company and the fees they earned".

"Fonterra has approximately 1.6 billion shares on issue, with the writedown recorded as at the date of writing approaching $4 billion off the balance sheets of shareholders over the period in question.

"Had correct accounting and audit practices been adhered to, then a significant number of share transactions could have traded at appropriate prices and the company would have had to address its issues much sooner."

Armer has been a shareholder of Fonterra since its creation. He told the FMA he and his wife Dale were Fonterra's largest shareholder with securities of around 10 million shares.

He said he had bought "very few" Fonterra shares between FY15 and FY19 and did not trade shares.