Its review of 30 June 2014 financial reports sees ASIC cover familiar ground, but with a greater emphasis on asset values and impairment testing.
ASIC has released its findings from a review of 30 June 2014 financial reports for 300 listed and other public interest entities. Seventy-three inquiries were raised, with the most recorded inquiries relating to impairment and asset values. The findings are a timely reminder for business. ASIC Commissioner John Price states:
"The largest number of our inquiries and findings continue to relate to inadequate asset impairment and inappropriate accounting treatments. Preparers of financial reports should focus on these areas and ensure that they provide high quality, useful and meaningful information to investors and others."
Asset values and impairment testing
ASIC is concerned that entities performing impairment testing are attempting to conceal impairment losses by:
- misallocating cash flows from one asset to support the carrying value of another asset;
- not considering the carrying value of assets related to the recoverable amount of the cash generating unit; and
- incorrectly including tax benefits or deducting liabilities.
The cash flows used in impairment testing should be grounded in assumptions that are reasonable given the entity's historical funding and market conditions.
Directors must also disclose key assumptions such as discount rates and growth rates. If the recoverable amount of a cash generating unit is calculated without a quoted price, then directors should also disclose the valuation technique used, management's approach to these assumptions, and whether these assumptions reflect past experience or are consistent with external sources.
Revenue recognition and expense deferral
ASIC reiterates that boilerplate accounting policies are not helpful to users of financial reports. Entity revenue recognition polices must be sufficiently specific to the entity, its business and sources of revenue. Expense deferral should only occur where there is a defined asset that will produce future economic benefit.
ASIC is also concerned about the recognition of intangible assets arising from development where costs are unclear and the deferral criteria is not satisfied.
ASIC has asked some entities about irregularities in their accounting for income tax. These include:
- low reported tax expense compared to reported profit;
- movements in temporary differences being inconsistent with movements in related accounting items; and
- unusual reconciling of accounting profit and tax liability.
Off-balance sheet arrangements and business combinations
ASIC has queried three entities on the non-consolidation of entities, including where the ownership interest is near 100% but the relevant activities of the investee are delegated to a separate decision-making body within the investee. Inquiries were also made of four entities about their accounting for business combinations.
Current classification of assets
ASIC is speaking to three entities about assets classified as current that would appear to be non-current.
Amortisation of intangible assets
Consistent with previous years, ASIC advises that amortisation periods must not exceed the period of the matching contractual or legal right.
Estimates and accounting policy adjustments
ASIC says that directors should disclose all information necessary for investors and others to understand the formation and impact of business judgments. Disclosure should include:
- key assumptions;
- reasons for judgments;
- alternative treatments; and
- appropriate quantification.
Auditors are required to disclose information on key audit matters in future audit reports.