The Australian Securities and Investment Commission (ASIC) has announced the areas it will be focusing on for 30 June 2014 financial reports. 

ASIC have stated that their surveillance will focus on material disclosures of information which is useful to investors and others who rely on these financial reports, such as key assumptions supporting accounting estimates. 

In this Alert, Partner Michelle Eastwell and Trainee Solicitor Kaitlyn Rafter outline the three main areas of ASIC’s focus and how your company can address them.

  1. Focus on Impairment

ASIC will be looking closely at impairment calculations in financial reports, so companies need to carefully consider the need to impair goodwill and other assets and the basis for determining impairment.  This is as a result of ASIC’s concerns that they continue to find unrealistic cash flows, forecasts and assumptions being used when companies are determining whether and to what extent assets are impaired.

Companies should carefully crunch their numbers and err on the side of caution when relying on assumptions or making forecasting predictions regarding impairments. 

For further information in relation to the matters that a company must take into consideration in determining whether or not an asset is impaired, please see our recent Alert on impairment of exploration assets. 

  1. Focus on Accounting Policy choices

Key accounting policy choices will also be reviewed by ASIC closely.  ASIC have identified that these include revenue recognition, expensing of costs that should not be included in asset values, tax effect accounting and the impact of new requirements for consolidations and joint arrangements particularly in respect of off-balance sheet arrangements.  ASIC will also be focusing on specific disclosures regarding the application of accounting policies, including disclosures of key assumptions and sensitivity analysis which enable readers to make their own assessments about the carrying values of the entity’s assets and risk of impairment.

Companies should give careful consideration to the application of key accounting policies and the disclosure of relevant information as to the application of these policies, particularly in areas where there are new requirements for the 2013/2014 financial year.

  1. The role of directors

Regardless of a director’s accounting expertise, they are still required to closely analyse and understand the contents of a financial report and seek explanations and professional advice to ensure that all accounting treatments chosen can be supported.  This falls within the duty of care and diligence that directors have under both the general law and theCorporations Act 2001 (Cth). Directors have a responsibility to ensure that reasonable steps are taken for the company to comply with its financial reporting and audit requirements under the Corporations Act.

Directors need to be financially literate and have sufficient knowledge of accounting principles and practices, as well as an appropriate understanding of the business and how it is reflected in the financial reports.  When reviewing financial reports, directors need to, amongst other things:

  • ensure, as far as possible and reasonable, that the information included is accurate, having regard to their understanding of the business, assets and future prospects – including the cash flows and assumptions used in the calculations;
  • consider and question the accounting treatments applied; and
  • examine the adequacy of disclosures and whether the disclosure of any additional matters should be made.

Further information regarding the areas that ASIC will be paying particular attention to in 30 June 2014 financial reports can be found on the ASIC website.