As a result of ASIC’s recent financial reporting surveillance:
The Australian Securities and Investments Commission (ASIC) recently announced the results of its surveillance of 30 June 2017 financial reports of 220 listed and other public interest entities (Media Release MR 17-437). Out of 220 financial reports they looked at, almost a quarter, i.e. 50 entities, received enquiries on 54 financial reporting matters.
Between June 2010 and 31 December 2016, ASIC’s enquiries have resulted in material changes to 4% of financial reports reviewed by them. The main changes related to impairment of assets, revenue recognition and expense deferral.
“The largest number of our findings continue to relate to impairment of non-financial assets and inappropriate accounting treatments. Directors and auditors should continue to focus on values of assets and accounting policy choices in preparing their 31 December 2017 financial reports.”
John Price, ASIC Commissioner
The 54 enquiries related to the following accounting matters:
| Financial reporting matter | Number of enquiries |
| Impairment and other asset values | 20 |
| Revenue recognition | 8 |
| Tax accounting | 8 |
| Expense deferral | 4 |
| Business combinations | 3 |
| Consolidation accounting | 2 |
| Operating segments | 2 |
| Other matters | 7 |
| Total | 54 |
At the time of writing the Media Release, ASIC noted that of these 54 enquiries, 18 (a third) have been closed without any further action required but the rest are still to be resolved.
Since May 2017, ASIC has issued media releases relating to entities that have amended their financial statements as a result of ASIC enquiries, resulting in a total adjustment to profit or loss of more than $750 million.
As we draw closer to the application date for the three new accounting standards, AASB 15 Revenue from Contracts with Customers, AASB 9 Financial Instruments, and AASB 16 Leases, we expect to see more enquiries in these areas too. ASIC also notes that some key audit matters in audit reports of listed entities were worded generally (boilerplate) rather than being specific to the circumstances of the entity.
ASIC make it clear that they do not pursue immaterial disclosures which may add unnecessary clutter to financial reports.
Enquiries in each of the above areas are highlighted below:
| Impairment |
Incorrectly determining the carrying amount of a cash-generating unit (CGU), including:
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Reasonableness of cash flows and assumptions not being supportable, including:
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| Fair value calculations using discounted cash flows with many management inputs (level 3 fair value) which may not represent market participant assumptions |
Ignoring impairment indicators such as:
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| Insufficient disclosures quantifying assumptions used to determine value in use and level 3 fair values and sensitivities. |
ResourcesPlease refer to ASIC Information Sheet 203 Impairment of non-financial assets: Materials for directors for more information. |
| Revenue recognition |
| Goods or services to be provided in future. |
| Multiple deliverables (goods and services). |
| Tax accounting |
| Adequacy of tax expense. Refer BDO’s article on uncertainty of income tax treatments |
| Whether probable that future taxable income is sufficient to enable recovery of deferred tax assets. |
| Expense deferral |
| Expenses capitalised as assets should have been charged to profit or loss (i.e. do not meet criteria for recognition as an asset). |
| Business combinations |
| Asset acquisition should have been treated as a business combination with goodwill recognised. |
| Consolidation accounting |
| Controlled entities not consolidated. |
| Inappropriate use of ‘investment entity’ exception. |
| Estimates and accounting policy judgements |
| Improve quality and completeness of disclosures. |
Disclosure requirements are principles-based and should include information to enable user to understand the judgements made and their effect, i.e. disclose:
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