Background

ASIC has released Media Release 16-174MR ASIC calls on directors to apply realism and clarity to financial reports, which outlines ASIC’s areas of focus for 30 June 2016 financial reports of listed entities and other entities of public interest with many stakeholders.

For 30 June 2016 financial reports, ASIC will focus on 3 key areas (discussed further below):

  • asset values;
  • accounting policy choices; and
  • material disclosures in accounts.

ASIC provides some commentary on the role of directors and notes that even though directors do not need to be accounting experts, they should seek explanations and professional advice supporting the accounting treatments chosen if needed and, where appropriate, challenge the accounting estimates and treatments applied in financial reports. Directors should particularly seek advice where a treatment does not reflect their understanding of the substance of an arrangement.

ASIC also proposes to review financial reports looking at risk-based criteria and also from a random selection.

Asset values

ASIC encourages preparers of financial reports and their auditors to carefully consider the need to impair goodwill, inventories and other assets. ASIC notes that it continues to find impairment calculations based on unrealistic cash flows and assumptions, as well as material mismatches between the cash flows used and the assets being tested for impairment. The recoverability of the carrying amounts of assets such as goodwill, other intangibles and property, plant and equipment continues to be an important area of focus for ASIC.

Focus should also be given to the pricing, valuation and accounting for inventories, including the net realisable value of inventories, possible technical or commercial obsolescence, and the substance of pricing and rebate arrangements.

ASIC notes that fair values attributed to financial assets should also be based on appropriate models, assumptions and inputs and that directors and auditors should focus on the valuation of financial instruments, particularly where values are not based on quoted prices or observable market data. This includes the valuation of financial instruments by financial institutions.

ASIC will also focus on assets of companies in the extractive industries or providing support services to extractive industries, as well as values of assets that may be affected by the risk of digital disruption.

Accounting policy choices

Directors and auditors should consider how the choice of accounting policy can affect reported results. These include the treatment of off-balance sheet arrangements, revenue recognition, expensing of costs that should not be included in asset values, tax accounting, and inventory pricing and rebates.  

Material disclosures

ASIC’s surveillance continues to focus on material disclosures of information useful to investors and others using financial reports, such as assumptions supporting accounting estimates, significant accounting policy choices, and the impact of new reporting requirements.