ASIC recently announced its focus areas for 30 June 2015 financial reports of listed entities and other entities of public interest with many stakeholders. The key focus areas are:
- impairment testing and asset values (to be read in conjunction with ASIC’s recently released Information Sheet 203:Impairment of non-financial assets: Materials for directors);
- accounting policy choices (including in areas such as revenue recognition); and
- material disclosures of information in financial reports (including assumptions and accounting policy choices).
While directors are not expected to be accounting experts, their responsibilities to guide and monitor management of the company remain. They should actively seek explanation and professional advice if needed, and where appropriate, challenge the accounting estimates and treatments applied in the financial report and adequacy of related disclosures. Further general information regarding directors’ responsibilities in relation to financial reporting can be found in ASIC Information Sheet 183Directors and financial reporting (INFO 183).
Impairment testing and asset values
ASIC has emphasised that the carrying amount of non-financial assets such as goodwill, identifiable intangible assets and property, plant and equipment will continue to be an important area of focus.
In particular, ASIC notes that directors and auditors should ensure:
- that cash flows and assumptions are reasonable, having regard to matters such as historical cash flows, funding costs, and economic and market conditions;
- discounted cash flows are not used to determine fair value less costs to sell where forecasts and assumptions are not reliable;
- value in use calculations should use sufficiently reliable cash flow estimates;
- cash flows used are matched to carrying values of all assets that generate those cash flows, including inventories, receivables and tax balances;
- different discount rates are used for cash generating units (CGUs) where the risks are different and the CGUs are located in different countries (with similar discount rates only being used where the risks are similar);
- CGUs are not identified at too high a level, and must not be at a higher level than the operating segments; and
- the impairment test in AASB 136 Impairment of assets is used for exploration and evaluation assets after technical feasibility and commercial viability have been demonstrated.
Particular consideration may need to be given to assets of companies in extractive industries and mining support services, as well as asset values that may be affected by digital disruption.
In addition, ASIC has released Information Sheet 203: Impairment of non-financial assets: Materials for directors (INFO 203) to assist directors and audit committees with their responsibilities in connection with the testing of non-financial assets for impairment in the financial report. ASIC highlights the role of directors and audit committees in questioning the company’s approach to impairment testing, and outlines matters that should be considered, including:
- determining the need for impairment testing;
- the process for assessing impairment (including issues concerning information quality and management expertise);
- common issues with impairment calculations; and
- questions that may be asked in relation to the external audit process.
Directors and auditors must also ensure that fair values attributed to financial assets should be based on appropriate models, assumptions and inputs (particularly where values are not based on quoted prices or observable market data).
Accounting policy choices
Directors and auditors should focus on the appropriateness of accounting policy choices that can significantly affect reported results. ASIC highlights the following policies:
- off-balance sheet arrangements;
- revenue recognition;
- expense deferral; and
- tax accounting.
ASIC will continue to focus on material disclosures in financial reports, such as assumptions supporting accounting estimates, significant judgements in applying accounting policies and the impact of new reporting requirements. ASIC highlights for directors and auditors:
- such disclosures are to be made, and they should be specific to the assets, liabilities, income and expenses of the entity;
- disclosure of key assumptions and a sensitivity analysis are important for users to assess asset values; and
- notes to financial statements disclose the impact on future financial position and results of new requirements for recognising revenue and for valuing financial instruments.