ASIC has identified a wide range of focus areas for 30 June 2014 financial reports of listed entities and other entities with a wide range of stakeholders. Directors, auditors and preparers of financial reports need to take particular care on these issues and should also consider whether any changes to their reporting and accounting policies and practices are necessary. Directors should also be particularly vigilant and pro-active in reviewing and challenging financial reports.
ASIC has announced its findings from 31 December 2013 financial reports of 135 listed entities and other public interest entities (and also 100 (mainly large) proprietary companies). As part of its review ASIC contacted 23 companies, with key issues looked at including inadequate impairment of assets and inappropriate accounting treatments. While the results of ASIC’s review are incomplete, ASIC’s risk based surveillance led to material changes to 4% of the financial reports previously reviewed for reporting periods ended 30 June 2010 to 30 June 2013, although matters involving 6 companies ended without any changes to their financial reporting.
ASIC has also announced its areas of focus for 30 June 2014 financial reports of listed entities and other entities of public interest with a large number and wide range of stakeholders. The 7 key areas of focus are:
- impairment testing and asset values with a focus on the recoverability of goodwill, other intangibles and property, plant and equipment, including the use of realistic cash flows and assumptions and an appropriate match between the cash flows used and the assets being tested for impairment;
- amortisation of intangible assets including the amortisation periods and methods applied for intangible assets;
- off balance sheet arrangements and new accounting standards AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities and AASB 13 Fair Value Measurement;
- revenue recognition, including ensuring recognition in accordance with the substance of the underlying transactions;
- expense deferral including ensuring expenses are only deferred where there is an asset as defined in the accounting standards, it is probable that future economic benefit will arise and the requirements of the intangibles accounting standard are met;
- tax accounting and ensuring that there is a proper understanding of both the tax and accounting treatments, the impact of any recent legislative changes are considered and the recoverability of any tax asset is appropriately reviewed; and
- disclosures regarding sources of estimation and significant judgements in applying accounting policies which should be specific to the assets, liabilities, income and expenses of the entity and inclusion of key assumptions disclosure and a sensitivity analysis.
This year, ASIC has also specifically highlighted the role of directors. It expects directors should:
- challenge, require explanations and seek professional advice in relation to accounting treatments chosen in financial reports, particularly if the treatment does not reflect their understanding of the substance of an arrangement; and
- review the cash flows and assumptions used in the calculations prepared by management, bearing in mind their knowledge of the business, its assets and the future prospects of the business.
Suggestions by ASIC to ensure high quality financial reports include:
- having a culture focused on quality financial reporting and adequate governance arrangements and considering internal accountability and management incentives tied to financial reporting quality;
- applying the accounting standards; and
- ensuring directors have appropriate financial literacy and applying appropriate experience and expertise to financial reporting, including engaging external experts where appropriate.
ASIC has also announced that as part of its surveillance of financial reporting from 1 July 2014, it will publically announce when, following contact from ASIC, a company makes material changes to information previously provided to the market.